China's main stock index tumbled more than 5 percent to a fresh 19-month low on Monday, hit by concern about slowing economic growth and rising producer price inflation, which threatens to squeeze corporate profit margins. The Shanghai Composite Index, which slid 4.47 percent on Friday, sank 5.21 percent to close at 2,470.074 points on Monday, after hitting an intra-day low of 2,453.707.
Its slide under 2,500 points took it below an area which analysts had previously considered strong support. The index's previous multi-month low was 2,566.528, hit on July 3 this year. Losing Shanghai stocks outnumbered gainers by 912 to 26, with about 300 shares plunging their 10 percent daily limits. Turnover in Shanghai A shares was tiny at 41.3 billion yuan ($6.0 billion) against Friday's 46.0 billion yuan.
Strong rebounds in foreign stock markets and falling global oil prices were eclipsed by worries that macroeconomic trends would hit corporate profit growth in the second half of 2008. The government announced on Monday that annual producer price inflation rose sharply to 10.0 percent in July from 8.8 percent in June. Economists polled by Reuters had given a median forecast for a 9.1 percent rise.
Producer price inflation is now well above consumer price inflation, pressuring companies' profit margins and threatening to cause a rebound of consumer price inflation later this year. "Producers' profit margins are being squeezed sharply. And even though tough market competition will delay the pass-through to retail prices, it will happen eventually," said Xing Zhiqiang, economist at China International Capital Corp "Potential inflationary pressures are building in the pipeline."
Meanwhile, the China Association of Automobile Manufacturers said on Friday that car sales in China rose 6.79 percent from a year earlier in volume terms last month, their slowest pace in two years. Not all recent economic data has been negative. Xinhua news agency, quoting the customs administration, reported on Monday that China's July trade surplus was much larger than analysts had forecast with both exports and imports outpacing expectations. Exports grew 26.9 percent from a year ago against a median forecast of 18.1 percent.
But investors focused firmly on the negatives on Monday. While many believed the government would try to prevent sharp falls in the market during the run-up to the Beijing Olympics, a politically sensitive period, they now fear the market may be left to slide after the Olympics. "The Olympics factor has now disappeared. The government has taken no concrete policies to bolster the market, so disappointed investors are voting with their feet," said Huang Yan, fund manager at Guotai Fund Management.
"Investors are so overwhelmed by pessimism that they're becoming indifferent to market-friendly rhetoric" by Chinese regulators trying to restore confidence, he added. Monday's close left the market index 60 percent below last October's record peak. It soared sixfold between June 2005 and last October in one of history's biggest equity bull markets.
Some fund managers are talking privately of the possibility of the index sliding to 2,200 points in coming weeks or months, but few are willing to forecast a floor. The panic on Monday cut the average premium of China's domestically listed A shares over Hong Kong-listed H shares in the same companies to 17 percent, the lowest level in 19 months. The average premium had fluctuated between 20 and 35 percent since mid-June.
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