Chinese stocks slump to near four-year low as risks mount

Chinese shares extended the world’s deepest slump and the yuan touched its weakest level in almost two years, testing the government’s ability to maintain market calm as risks mount for Asia’s largest economy.

Fears of widespread margin calls fueled a 3 per cent tumble in the Shanghai Composite Index, which sank to a near four-year low, as more than 13 stocks fell for each that rose.

Efforts by local governments to shore up confidence in smaller firms failed to boost sentiment. The yuan sank beyond its closely watched August low after the US Treasury Department stopped short of declaring China a currency manipulator, a move that some interpreted as giving Beijing breathing room to allow a weaker exchange rate.

Chinese policy makers face a tough balancing act as they try to maintain financial stability amid slowing economic growth, a trade war with America and rising US interest rates. Beijing has so far refrained from major market rescue efforts of the sort that followed the nation’s 2015 equity crash, but some investors are calling for bolder action.

With $603 billion of shares pledged as collateral for loans, or 11 per cent of China’s market capitalisation, one concern is that forced sellers will tip the market into a downward spiral. “It’s high time the state stepped in,” said Dong Baozhen, a fund manager at Beijing Tonglingshengtai Asset Management. “The national funds cannot just sit on the sidelines and watch this atmosphere of extreme pessimism.”

Officials in Shenzhen and Shunde, as well as Beijing’s Haidian district, have moved to help listed firms in their areas, according to local authorities and media reports. At least 36 companies have seen pledged shares liquidated by brokerages since the start of June, according to company filings.

The Shanghai Composite closed at 2,486, its lowest finish since November 2014. The gauge has slumped about 30 per cent from a January high. US Fed minutes on rate increases and news the US plans to withdraw from a postal treaty favourable to Chinese firms added to bearish sentiment.