Chinese Stock Index Caps Longest Monthly Losing Streak Since ’04

China’s benchmark stock index fell, capping a fourth month of losses, after declining earnings at companies from Citic Securities Co. (600030) to Sany Heavy Industry Co. showed the impact of the nation’s economic slowdown.

Citic Securities, the nation’s biggest listed brokerage, dropped 1.2 percent and Sany Heavy sank to its lowest level since October 2010. Industrial & Commercial Bank of China Ltd., the nation’s biggest lender, slipped 0.8 percent after earnings growth slowed. Qingdao Haier Co., the largest refrigerator maker, climbed 3.9 percent after first-half profit rose.
Enlarge image China’s Stocks Head for Longest Monthly Losing Streak Since 2004

China Eastern lost 0.3 percent to 3.40 yuan. The carrier said first-half profit tumbled 65 percent, joining China Southern Airlines Co. and Air China Ltd. in reporting lower profit after fuel prices rose and traffic growth cooled. Photographer: Nelson Ching/Bloomberg

“Corporate earnings aren’t likely to have a big rebound in the second half of the year given the sluggish economy,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co., which manages about $120 million. “The government may step in to boost confidence in the market through measures such as encouraging share buybacks.”

The Shanghai Composite Index (SHCOMP) fell 0.3 percent to 2,047.52 at the close, the lowest level since February 2009. The CSI 300 Index (SHSZ300) slipped 0.3 percent to 2,204.87. The Hang Seng China Enterprises Index (HSCEI) of Chinese companies traded in Hong Kong retreated 0.4 percent. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, slid 0.9 percent in New York yesterday.

Signs that China’s economic slowdown is deepening dragged the Shanghai Composite down 2.7 percent in August, a fourth straight month of declines. That’s the longest streak since August 2004, according to data compiled by Bloomberg.
Worst Performer

Macquarie Group Ltd. lowered China equities to neutral from overweight, citing the deteriorating outlook for banks amid a “disturbingly” widespread weakness in the economy, according to a note dated yesterday.

The Shanghai gauge has tumbled 8 percent this quarter, the worst performer after Cyprus among 93 global stock benchmark index tracked by Bloomberg, and has lost 6.9 percent for the year. The measure trades at 9.3 times estimated earnings, the lowest level since January, according to weekly data compiled by Bloomberg.

Citic Securities fell 1.2 percent to 10.22 yuan after saying net income dropped 24 percent from a year earlier in the first six months. Sany Heavy, the biggest machinery maker, slid 4 percent to 9.87 yuan after it said first-half profit fell 13 percent.
Profit Slowdown

ICBC dropped 0.8 percent to 3.82 yuan. Net income climbed 11 percent in the second quarter to 61.8 billion yuan ($9.73 billion), according to first-half figures reported yesterday by the Beijing-based bank. Combined earnings of China’s five biggest lenders increased 13 percent to 203.6 billion yuan in the quarter, slowing from 33 percent a year earlier.

Central Huijin Investment Ltd., a unit of China’s sovereign wealth fund, bought more yuan-denominated A shares of the nation’s four largest banks including ICBC in the second quarter, the Shanghai Securities News reported today, citing lenders’ interim reports.

China’s 2,453 publicly traded companies’ combined first- half net income dropped 0.38 percent from a year earlier to 1.01 trillion yuan, the China Securities Journal reported today, citing the newspaper’s own statistics. First-half average earnings per share fell 28 percent and combined inventory rose 17 percent, it said.
Disappointing Earnings

Listed companies finish releasing first-half earnings reports today. Fifty-eight percent of companies in the Shanghai Composite missed analysts’ estimates for second-quarter profit, while 41 percent beat projections, according to data on 242 earnings reports compiled by Bloomberg.

Qingdao Haier advanced 3.9 percent to 10.45 yuan. The appliance maker said first-half profit rose 21 percent from a year earlier.

“Company earnings are not coming in great and they are somewhat disappointing,” Arjun Jayaraman, who manages $400 million in emerging-market equities at Causeway Capital Management, said in a phone interview from Los Angeles yesterday. “That shows the impact of China’s slowdown. It will take longer for corporate earnings to recover than it takes the economy to rebound.”

The National Bureau of Statistics and China Federation of Logistics and Purchasing are due to release a manufacturing index for this month tomorrow. The Purchasing Managers’ Index may fall to 50 from 50.1 in July, according to the median estimate of 24 economists by Bloomberg. Fifty marks the dividing line between expansion and contraction.

Thirty-day volatility in the Shanghai Composite was at 11.7 today, compared with this year’s average of 17.1. About 4.6 billion shares changed hands in the gauge today, 41 percent lower than the daily average this year.

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., slid 1.6 percent to a one- month low of $32.95 yesterday.

CITI: The Chinese Stock Market Is Breaking Through The Last Vestiges Of Support


One of the ugliest charts of the year has been the Shanghai Composite, which continues to sink to new lows as other global stock market indexes near their highs.

Tom Fitzpatrick, Citi's top technical analyst thinks that the Shanghai Composite is setting up for another huge leg down.

Here's an excerpt from his latest report via King World News:

We believe the Shanghai or Chinese stock market is now breaking through the last vestiges of support (see chart below).  If we do push decisively through this area, around 2,050 on the composite, we think there is a real danger that it could open up the way to take us all the way back to the lows that were posted in 2008, around 1,665, or an additional plunge of roughly 19% on the Shanghai Index.

If we get a close through this support, then the bias would be for an acceleration to the downside.