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China Stocks Recover Losses in Late Trading as Volatility Climbs

(Bloomberg) -- China’s stocks erased steep losses in the last hour of trading, led by financial companies, as a second day of wild price swings tested the government’s plan to trim support for the equity market.

The Shanghai Composite Index climbed 0.3 percent to 3,445.41 at the close, erasing a loss of as much as 3.2 percent, as a gauge of volatility traded near its highest level in two months. Bank of China Ltd. jumped the most in three months to pace gains for lenders. The benchmark gauge climbed 1.9 percent this month, the smallest move since January.

Friday’s plunge, the biggest in three months, illustrates the challenge facing Chinese officials as they seek to wean the equity market off government support without precipitating another crash. As price swings on the index fell to their lowest levels since March, the government lifted a freeze on initial public offerings, raised margin requirements and scrapped a rule requiring brokerages to hold net-long positions.

"The declines reveal that the stability the market saw was just a veneer,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong, who predicted state- backed funds may intervene to support the market.

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China’s stock rout from mid-June through August was only halted after the government took a series of measures to backstop the market, including banning major stakeholders from offloading shares, ordering state funds to buy and restricting short selling. Policy makers also armed one state agency with more than $480 billion to prop up shares. The Shanghai Composite re-entered a bull market earlier this month.

On Friday, there was little sign that government-run funds had stepped in to ease the selloff. PetroChina Co., long suspected to be a target of state-backed fund buying because of its large weighting in the Shanghai Composite, sank 5.7 percent. While government intervention has typically showed up in the last hour of trading, the stocks gauge extended losses in the final 60 minutes to close near its lows of the day. PetroChina dropped 0.7 percent on Monday.

“I would expect that they will purchase stock only when they really feel that it is necessary,” said Gerry Alfonso, a sales trader at Shenwan Hongyuan Group Co. in Shanghai. “If the drop increases then we might see some buying from the state- linked funds.”

The CSI 300 Index rose 0.3 percent on Monday, led by financial companies and utilities. Hong Kong’s Hang Seng China Enterprises Index dropped for a sixth day, losing 0.7 percent, while the Hang Seng Index slipped 0.3 percent. The ChiNext index, dominated by technology and new economy shares, gained 0.9 percent.

Banks and property developers led gains in the CSI 300’s financial sub-index, which has the heaviest weighting in the broader gauge at 39 percent. China Citic Bank Corp. rose 3 percent. China Vanke Co. and Poly Real Estate Group Co. added at least 4.4 percent.


Manufacturing Data


China Yangtze Power Co. advanced 3.6 percent. Some users will be allowed to directly purchase electricity from power companies, according to guidelines on power reform on the National Development and Reform Commission’s website.

Industrial companies slumped before Tuesday’s manufacturing data. CRRC Corp., China’s biggest maker of railway equipment, and China First Heavy Industries slid at least 2 percent.

The official purchasing managers index is likely to be unchanged at 49.8 in November from the previous month, according to the median estimate of economists surveyed by Bloomberg. The line between expansion and contraction is at 50. Recent data showing falling exports and slowing industrial output underscore the government’s challenge to kick-start growth in an economy weighed by overcapacity and debt.


IPOs Resume


Ten companies including Hubei Kailong Chemical Group Co., which priced its initial public offering on Friday, start marketing IPO shares in the first three days of this week after the regulator ended a five-month freeze on new stock sales. Nearly every time a new batch of companies took orders over the past year, money-market rates climbed and the Shanghai Composite slumped as investors hoarded cash for their bids.

China is switching to a new IPO system in part because a pre-funding requirement has been wreaking havoc on liquidity conditions in the nation’s financial system. The 28 companies in total that will be allowed to proceed with their IPOs by the end of 2015 will probably tie up 3.4 trillion yuan ($532 billion), according to the median of six analyst estimates compiled by Bloomberg.

“I would be taking some chips off the table,” said Hao Hong, Hong Kong-based equity strategist at Bocom International Holdings Co. “The market has had a good rebound. I think the regulators are trying to make price determination more market driven. For this purpose, it must relinquish permanent life support at some point.”


--With assistance from Zhang Shidong.


To contact the reporter on this story: Kyoungwha Kim in Hong Kong at kkim19@bloomberg.net To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net Allen Wan