Chinese Stocks Approach Bear Market as Fears Over Trade Rattle Investors

Shen Hong

The Wall Street Journal

Biography
@shenhongdjn

June 19, 2018 6:19 a.m. ET

SHANGHAI—Chinese shares fell to their lowest level in nearly two years, as investors nervous about the prospect of an escalating trade war between the U.S. and China dumped everything from large insurers to small tech firms.

The pessimism spread to most corners of the country’s financial markets, hitting China’s recently resilient currency and commodities including iron ore and rubber.

The benchmark Shanghai Composite Index plunged 3.8% to 2907.82 on Tuesday, its lowest since June 22, 2016, marking its worst single-day performance since Feb. 9 when Chinese stocks were caught up in a world-wide selloff.

The Shenzhen-based ChiNext board, where the majority of China’s most promising tech companies are listed, finished down 5.8%, its biggest one-day slide since June 13, 2016. Chinese markets had been closed on Monday for a national holiday.

The Shanghai and Shenzhen indexes are down 18.3% and 18.7%, respectively, from their January highs, inching closer to a bear market—defined as a decline of at least 20% from a recent high.

“It’s mainly the trade war that has created such panic in the market because the latest developments have surpassed the expectations of many people in China,” said Zhang Gang, senior analyst at Central China Securities.

President Donald Trump intensified the U.S.’s trade conflict with China on Monday by asking his administration to identify a new list of $200 billion of Chinese goods that could be penalized with tariffs. The U.S. applied tariffs last week on $50 billion of imports from China. Beijing has pledged to retaliate in kind.

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The selloff was widespread. In Shanghai, energy giant PetroChina was down 4.4%, while Citic Securities, China’s top brokerage, tumbled 6.4%. In Shenzhen, telecom-equipment maker ZTE’s shares fell by 10%, the daily limit on Chinese markets. Overnight, the U.S. Senate passed a measure that would reinstate a ban on the company’s buying of U.S.-made components.

The trade tensions also pressured the yuan. It fell 0.9% to 6.4710 against the U.S. dollar in onshore trading, its lowest level in five months and its biggest one-day drop since Feb. 8.

Iron-ore futures traded in Dalian fell 4.6% while rubber futures in Shanghai were off 5.7%. There was one relative winner: Chinese soybean-meal futures jumped 3.6% in response to Beijing’s announcement last Friday that it plans to impose tariffs on U.S. imports of soybeans. The U.S. is China’s second-largest supplier of the commodity, which is primarily used as feed for pigs, chickens and fish.

“We don’t think the trade war will end in the short term, so the market will become even more volatile,” said Xiaoqing Xu, managing director of Preston Asset Management, a Shanghai-based hedge fund.

Aggravating the impact of the trade war are signs that Beijing remains committed to its campaign to reduce China’s high debt load and leverage in financial markets.

Guo Shuqing, the country’s top banking and insurance regulator, said at a forum in Shanghai last week that the government must “proactively eliminate latent economic and financial risk.”

China’s total debt could reach nearly 250% of its gross domestic product by the end of this year, according to S&P Global Ratings, up from 170% in 2012.

Beijing has raised short-term interest rates several times in the past year to push up borrowing costs. It has also campaigned against so-called shadow banking and various forms of short-term debt issued between banks to deter speculative, leveraged bets that have amplified risk in bond and stock markets.

“It’s very easy for Chinese stocks to fall on a day like this because we have close to 90 million emotionally very fragile retail investors,” said Honglin Gu, a retail investor from the eastern Jiangsu province. “Herd mentality works the best here.”

Mr. Gu said he plans to err on the side of caution. “I was thinking about doing some bargain hunting today, but then I thought I’d better wait for a few days. I don’t want to stand in front of a running train,” he added.

—Lucy Craymer and Steven Russolillo contributed to this article.

Write to Shen Hong at hong.shen@wsj.com

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