China’s markets fell sharply after a stretch of calmer trading earlier Wednesday, reviving the choppy period of trading from the past two weeks that rolled back some gains from a yearlong bull market.
The Shanghai Composite Index closed down 5.2% after trading largely flat earlier, while the smaller Shenzhen market ended 4.8% lower, after being up 2.4% earlier. The ChiNext board fell 3.5% after earlier gains of as much as 5.2%.
The Shanghai index is off 22% from its mid-June high, pushing the index back into bear territory, defined as a 20% drop from a high. The index rallied 5.5% on Tuesday, which some market participants put down to state entities buying blue-chip stocks. Beijing also announced a raft of policies aimed at soothing market tensions, including plans to allow the state pension fund to invest in stocks and lower the stamp duty on share purchases. Over the weekend, the central bank cut interest rates, its fourth such move since November.
Some observers, however, said they didn’t expect a prolonged rally to take hold. Market sentiment remains weighed down by expectations that investors who have taken on huge amount of debt to fund stock purchases during the rally will be forced to sell stocks in coming weeks to pay back loans to brokers, exacerbating market weakness.
“We don’t think that the deleveraging process in the stock market has run its course and the market may stay volatile in coming weeks,” said analysts from Bank of America Merrill Lynch. “Longer term, the psychological damage from the two-week long sharp market decline may linger for a while. This means that any market rebound will unlikely be strong in our view.”
Weakness in China’s economy is another drag on the market. A private sector gauge of Chinese manufacturing conditions compiled by HSBC and Markit released Wednesday fell to 49.4 compared with 49.2 a month earlier, missing a preliminary estimate, and below the 50-mark that separates contraction from expansion.
Exports from the region have been dismal in recent months amid China’s slowdown, patchy demand in the U.S. and Europe’s fragile recovery. Nations that export heavily to China also are feeling pain: South Korea’s manufacturing purchasers index slipped to 46.1 in June from 47.8 in May, the deepest contraction since September 2012. On Tuesday, South Korea reported its exports fell for a sixth straight month by 1.8% in June.
Global markets stabilized even as Greece defaulted on its EUR1.55 billion loan ($1.73 billion) to the International Monetary Fund, with creditors rejecting a last-ditch effort to buy more time. The euro was flat in early Asia trade, trading down 0.1% to the U.S. dollar at $1.1130.
In Japan, the Nikkei 225 Stock Average rose 0.2% after the Bank of Japan’s quarterly tankan survey showed improving confidence among big manufacturers in the second quarter.
“The default itself had been expected from last weekend and therefore should not result in any new shock to the stock market,” says Hideyuki Ishiguro, strategist at Okasan Securities. “Investors remain wary of taking on any new risk, however, and that should limit any gains today until Sunday’s Greek referendum, on whether or not to accept conditions for another bailout, is done.”
South Korea’s Kospi Composite gained 1% while Australia’s S&P/ASX 200 rose 0.4%. Hong Kong’s market is closed for a holiday.