China shares slumped to their lowest since early 2009, reversing Hong Kong gains on Tuesday morning, with losses accelerating for mid-sized banks as mainland interbank rates started climbing, deepening market jitters.
There are increasing fears over a liquidity crunch in China. The losses began after China's central bank urged banks Sunday to control credit risks. Borrowing costs in the country have been rising as economic growth slows, and the government cracks down on illegal capital inflows and attempts to rein in shadow banking.
The People's Bank of China (PBOC) said in a statement yesterday that commercial lenders would be urged to take "pre-emptive" measures to manage liquidity while "invigorating existing cash", the latest sign the new mainland leadership would stand firm on their efforts to de-leverage an economy battered by increasing financial risks.
In other words, the central bank has restrained from injecting funds into money markets in an attempt to rein in excessive credit growth. This hands-off approach has unnerved investors.
Ratings agency Fitch has warned that the scale of credit in the economy was so extreme that it would find it difficult to grow its way out of the excesses.
However, the central bank, in a statement said today that it will stabilise expectations and guide market rates to reasonable levels. It will also
continue monitoring the liquidity in the banking system and will have flexible management of liquidity.
By midday, the weighted-average seven-day repo rate was slightly higher than it closed at on Monday after the Chinese central bank on Tuesday opted to stand pat at the first of two scheduled open market operations this week.
At midday, the CSI300 of the leading Shanghai and Shenzhen A-share listings was down 4.8 per cent at 2,067.8, its lowest since February 2009.
The Shanghai Composite Index dived 3.8 per cent to its lowest since January 2009.
Losses of almost 11 per cent on the CSI300 this week have pushed its relative strength index to 14.1, suggesting it is at its most technically oversold level since the indicator was started in 2005.
The Hang Seng Index slid 1.4 per cent, while the China Enterprises Index of the top Chinese listings in Hong Kong tumbled 2.8 per cent. Both reversed early gains as turnover picked up in late morning trade.
According to Moody's, the nation's small to medium sized lenders that are dependent on the interbank market are especially vulnerable under the current tight liquidity environment. "These banks are likely to aim to strengthen their liquidity buffers by competing more aggressively for deposits to reduce dependence on the interbank market. But this will reduce net interest margins. Moreover, these banks are likely to curtail lending growth," Moody's Bin Hu was quoted as saying by CNBC.
In Shanghai, China Minsheng Bank plunged 9.9 per cent - the same per centage by which it fell on Monday - while Industrial Bank tumbled 5.7 per cent to its lowest since early December. The Shanghai financial sub-index slumped another 5.2 per cent after sinking 7.3 per cent on Monday, its worst day since November 2008.
The "Big Four" Chinese banks were comparatively less hit in Shanghai. Industrial and Commercial Bank of China (ICBC) slipped 0.3 per cent and China Construction Bank (CCB) edged down 0.5 percent. In Hong Kong, ICBC shed 1.6 per cent, CCB 1 per cent, Bank of China 0.3 per cent while Agricultural Bank of China sank 1.7 per cent and Minsheng dived 4.7 per cent.
"The perception of China is they are in the same kind of situation as the U.S., and yes it is true that a lot of loans are going to go bad, and that banks have been hiding a lot of these loans in so called trust companies," Franklin Templeton's Mark Mobius told CNBC.
"We have to ask what the consequence is, what will happen as a result, and the scenario will be very, very different in China, simply because the banks are controlled by the government, so they will not be allowed to go bankrupt," he added. ( Read the full report here)
Rising on Tuesday was FIH Mobile, which said it expects to return to profit for the first half of 2013. FIH shares climbed 2.9 per cent in Hong Kong.
Other growth-sensitive sectors from materials and energy to property were broadly weaker, on fears that the jammed interbank market was affecting fund availability for companies.
In Hong Kong, property developer Sunac China fell 8.2 per cent, while shipper China Cosco lost 7 per cent. China Coal slumped 5.9 per cent to its lowest since November 2008.
"This is a market in capitulation, it's not worth trying to catch any technical rebound. We have seen this movie before, look at how much the market tanked in 2008," said Hong Hao, chief strategist at Bank of Communication International Securities.
With inputs from Reuters