By Gregor Stuart Hunter
Chinese markets fell sharply early Wednesday, even as Beijing
scrambled to arrest a three-week selloff.
China has introduced fresh measures to restore investor
confidence seemingly to little avail. Stocks and Chinese bonds
traded offshore, even high-quality corporate bonds issued by top
state-owned companies, are getting dumped. China's yuan, freely
traded in the offshore market, hit a four-month low against the
U.S. dollar amid a dimming outlook for the world's second-largest
economy.
A spokesman of the China Securities Regulatory Commission, Deng
Ge, described the current market mood as "panic sentiment." In a
statement, he said, "Irrational selloffs have increased greatly and
that has led to a liquidity tension in the stock market."
The Shanghai Composite fell as much as 8.2% at the start of
trading. The index is now down 4% at 3576.79. The smaller Shenzhen
Composite fell 3.9%. China's main stock benchmarks have lost more
than a third of their value since hitting mid-June highs.
Hundreds of Chinese stocks were frozen from trading Wednesday,
with 1,287 companies halted. That represents 45.6% of the
constituent stocks of the Shanghai Composite and Shenzhen Composite
and $2.5 trillion of market capitalization, according to data from
FactSet.
In Hong Kong, which has until recently fared better than the
Chinese mainland, the benchmark Hang Seng Index dropped 4.2%, while
a gauge of Chinese companies with Hong Kong listings, known as
H-shares, plunged as much as 6.7% before easing losses to 5.5%.
China has put an arsenal of measures to work in recent days to
stem the selloff that has wiped out roughly $2.4 trillion in value
from China's equities. On Wednesday, the China Securities
Regulatory Commission announced that the China Securities Finance
Corp., a commission unit that provides financing for margin
trading, will increase purchases of small-cap stocks. The move
follows an earlier pledge by the company to buy blue-chip shares to
stabilize the market.
China's central bank also said it would help ensure the China
Securities Finance Corp. has ample liquidity to stabilize the
market. The state-backed company may tap the interbank market,
issue bonds, use mortgage financing and borrow from relending
facilities, the People's Bank of China said in a statement.
In the onshore market, the Chinese yuan hit 6.2094 per dollar,
compared with 6.2100 as the market closed Tuesday. The price for
the yuan in the offshore market, where it can trade freely, fell to
as low as 6.2290 per dollar--the weakest level since March
18--compared with 6.2212 late Tuesday. China's central bank fixed
the yuan's official rate for Wednesday at 6.1175 a dollar, a touch
weaker than 6.1166 Tuesday.
Spot yuan trading in the onshore market has been 1.6% weaker
than the reference rate in Wednesday trading. When the offshore
rate trades weaker than the mainland rate, that typically indicates
waning demand among non-Chinese investors for the currency. China's
central bank controls the onshore rate by setting a daily reference
rate for the yuan, but allows it to trade 2% above or below that
level.
Investors are also selling Chinese bonds that trade offshore
market. "People lost confidence towards China's credits. Everything
is down. The riskier the bonds, the heavier they're being sold.
Property developers are having some of the biggest casualties,"
said Frank Huang, fixed income trader at SinoPac Securities in Hong
Kong. Bond yields of major property firms such as Agile Property
Holdings Ltd. and Shimao Property Holdings Ltd. hit their highest
levels in several weeks. Bond prices move inversely to yield.
While high-quality investment-grade bonds, including top
state-owned companies, have been resilient in the past few weeks,
these assets are also getting pressured, traders say. Yields of
bonds issued by state-owned enterprises such as grid operator State
Grid Corp. and oil giant Cnooc Ltd. have risen seven to 10 basis
points Wednesday morning.
Inside China, investors seeking to keep their money out of risky
stocks are flocking the onshore bond market. Benchmark 10-year
Chinese government bond yields fell to 3.4% Wednesday from 3.6%
earlier this month.
Over the weekend, Beijing suspended initial public offerings and
made it easier for investors to borrow to buy stocks. China's
brokers also vowed to buy shares until the Shanghai Composite hits
the 4500 level. Despite the recent rout, China's main stock index
is up 72% over the past year and 10% since January.
Still, concerns are brewing that Beijing's increasingly
desperate measures to calm markets are building bigger risks into
the country's financial system, particularly a commitment from the
People's Bank of China to provide unlimited liquidity support to
China Securities Finance Corporation.
"The rescue plan could potentially increase the systemic risk
down the road," analysts from Société Générale wrote in a research
report. "Initially most of the stock market risk was with
households, but with the rescue plan, systemically important
institutions are taking up more risk when the market is still under
immense downward pressure. Our biggest concern is that the progress
of structural reform could suffer as the result."
Worries about China's faltering demand amid the stock slide are
also driving down commodity markets, with copper hitting a six-year
low on Tuesday. China is the world's top copper consumer,
accounting for about 40% of global consumption. Pessimism about
China, coupled with worries about a supply glut, also sent U.S. oil
prices to a near three-month low Tuesday.
Brent, the global oil benchmark, rose 37 cents, or 0.7%, to
$56.85 a barrel on ICE Futures Europe, after falling as low as
$55.10 a barrel earlier in the session.
"Fears about the risks to financial stability and the wider
economy have contributed to negative sentiment toward commodities,"
analysts from Capital Economics wrote in a research report. "The
impact has been felt most in industrial metals, such as copper,
where China is by far the most important consumer."
Meanwhile, eurozone leaders set a Sunday deadline for Greece to
come up with a new set of more stringent measures to avoid
defaulting on the European Central Bank and exiting the currency
union. While the leaders raised the possibility of some short-term
financing to help Athens make a July 20 payment, many of the policy
overhauls and budget cuts demanded were overwhelmingly rejected by
Greek voters in a referendum last weekend.
The Nikkei 225 Stock Average declined 1.5% in early trading
while Australia's S&P/ASX 200 fell 1.7%. South Korea's Kospi
Composite was down 1.3.
Global bond markets rallied as investors sought haven assets in
developed-country debt. Yields on benchmark U.S., German, and U.K.
bonds hit their lowest levels in more than a month. On Tuesday, the
International Monetary Fund warned of the risks of raising rates
too early in the U.S., and called for the Fed to delay a raise
until 2016. Concerns that the Federal Reserve would raise rates
prompted a bond selloff in June, given concerns that higher rates
would lower their outstanding value.
The euro also sank 0.5% against the Japanese yen as investors
sought assets perceived to be safe.
Grace Zhu contributed to this article.
Write to Gregor Stuart Hunter at gregor.hunter@wsj.com and Fiona
Law at fiona.law@wsj.com