Chinese stocks plunge as state's support buying ceases

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UPDATED: Chinese shares continue to plunge as confusion reigns

Chinese investors face the prospect of further heavy losses as worries mount that authorities are pulling back on measures to prop up the market.

Stocks on China’s three main markets fell the most in eight years yesterday.

The Shanghai Composite Index ended down 8.5% at 3725.56, its second-straight day of losses and worst daily percentage fall since February 27, 2007.

The index is up 6% from its recent low on July 8 but still off 28% from its high in June.

The smaller Shenzhen Composite fell 7% to 2160.09 and the small-cap ChiNext closed 7.4% lower at 2683.45.

Analysts attributed the sharp fall to variations on a theme that the government is either testing the market to see whether it can support itself or has stopped buying blue chip stocks.

The fall follows three straight weeks of gains since the market lost 30% in a week in early July.

It is estimated a state-owned fund called China Securities Financial Corporation (CSFC) has spent hundreds of billions of yuan in supporting the market, although authorities haven’t disclosed a total figure.

A spokesman for the securities regulator said the CSF would continue buying to resume to prevent further falls.

More than half of the stocks in the Shanghai Composite hit their down limit yesterday.

While limits on sharp stock movements prevented hundreds of stocks from logging sharper declines, they also can make it harder for investors to exit positions.

China’s market rules prevent share prices from moving freely once they rise or fall by 10%.

Meanwhile, hundreds of stocks that were halted during the throes of the rout have returned to trade.

Elsewhere, other Asian markets declined more modestly, pressured by disappointing earnings results overseas.

Hong Kong’s Hang Seng Index fell 3.1%. Australia’s S&P ASX 200 rose 0.4%, Japan’s Nikkei Stock Average fell 1% and South Korea’s Kospi was off 0.4%.

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