China investors brace for stock market free fall

Beijing (dpa) – China has rolled out a dizzying array of stimulus and loosening measures this year, including multiple interest rate cuts and this month’s surprise yuan devaluations.

But investors are increasingly showing signs that they don’t believe the government will be able to bolster growth as the world’s second-largest economy slows down.

“I have sold off most of my China shares and I am planning to invest in overseas companies instead,” said Mason Zhao, a Beijing-based investor.

On Monday, the benchmark Shanghai Composite Index dived 8.49 per cent to close at 3209.91 points. It was the biggest one-day fall since February 27, 2007 during the global financial crisis.

The tumble followed a tumultous week that saw the index fall 11 per cent.

“China is trying to adjust to a transforming economy, but it is going to be difficult to improve the situation,” said Hu Xingdou, professor of economics at the Beijing Institute of Technology.

Hu warned slowing growth could widen the gap between the country’s rich and the poor.

Investors fear a market rout, analysts say, worse than the one in July that saw shares lose over 30 per cent of their value from a peak in mid-June.

Analysts earlier said widespread margin trading, where investors borrow money from a broker to buy stocks, had fuelled price rises and fears of a bubble. The release last week of draft rules to curb the practice may have provoked a correction, some said.

“It is possible the index will drop below July’s lowest point and fall below 3,000 points,” said Shanghai-based independent financial analyst Ye Tan.

“People are panicking. But the question now is whether the tumble at the stock market will weaken the real economy,” Joerg Wuttke, president of the European Union Chamber of Commerce in China, told dpa.

“The basic problem is not the stock prices, but weak demand, overcapacity and high debt in the corporate sector. It is also difficult to develop the service sector to create new jobs,” Wuttke said.

But Liu Yuanchun, vice dean of the School of Economics at the People’s University in Beijing said it is unlikely the market will collapse to 2007-2008 levels, where the Shanghai index dropped to about 1,000 points.

“Stocks falling back to their real value is a necessary step, and a normal phenomenon,” Liu said.

China is struggling to meet its growth target for 2015 of about 7 per cent – itself a slowdown from recent years – amid sluggish investment growth and recent figures showing falling exports and imports.

The country’s gross domestic product grew 7.4 per cent in 2014, the weakest annual expansion in 24 years.

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