China Stocks Enter Bear Market as Index Falls 20% From High

By Bloomberg News

Aug. 19 (Bloomberg) -- China’s stocks fell, driving the benchmark index into a so-called bear market more than 20 percent below this year’s high, on concern the nation’s economic recovery will falter as the government reins in lending.

The Shanghai Composite Index fell 4.7 percent to 2,774.77 as of 2:44 p.m. local time today, increasing its loss since the 14-month high on Aug. 4 to 20.2 percent. The gauge remains 59 percent below its record level on Oct. 16, 2007.

Prime Minister Wen Jiabao’s 4 trillion yuan ($585 billion) stimulus package, coupled with record bank lending in the first six months, helped the Shanghai index to more than double this year from the low on Nov. 4. The rally faltered as new loans in July declined to less than a quarter of June’s level, the regulator allowed initial share sales after a nine-month moratorium and companies including Yunnan Copper Industry Co. reported losses. China follows Russia among the so-called BRIC bloc of major emerging economies to have entered bear markets.

“The current correction is reflecting the tightening in lending,” said Andy Xie, a former Asian chief economist at Morgan Stanley, who correctly predicted in April 2007 that China’s equities would tumble. “We’ve seen the peak of this market cycle, though there’s likely to be a bounce as the government seeks to stabilize the market.”

The market may extend its decline by another 10 percent, Xie said Aug. 17. Even with the recent decline, the Shanghai index is trading at 30.4 times reported earnings, against 17.5 times for shares on the MSCI Emerging Markets Index.

An estimated 1.16 trillion yuan of loans were invested in stocks in the first five months, China Business News reported on June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council, China’s Cabinet.

To contact the Bloomberg News staff for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net