SHANGHAI (Reuters) - China’s stock markets fell sharply on Monday, extending last week’s sell-off, as the spectre of rising borrowing costs hitting company profits haunts investors amid an increasing regulatory crackdown on risky financing.
Selling in China’s stock markets had been prompted by a rout in the bond market that pushed yields on government treasury bonds to three-year highs, and by fresh moves to reduce risks in the asset management industry that may bring a sea change for banks and millions of small investors.
The blue-chip CSI300 index fell 1.3 percent in the morning session to 4,050.24 points.
The index had closed barely higher on Friday as afternoon buying erased earlier losses, following its worst one-day drop in nearly 18 months on Thursday.
The Shanghai Composite index was 0.8 percent lower at 3,326.82, while Hong Kong’s Hang Seng index lost 0.4 percent to 29,737.45.
Major internet-of-things supplier BOE Technology, seen as a blue-chip bellwether, tumbled 7.1 percent on news that major shareholders planned to cut their stakes in the company.
Shares in the company surged 51.6 percent from the beginning of October to a nine-year high on Nov. 21, but have since plunged 19.5 percent.
“Blue chips have been rising too fast ... and soaring prices of stocks such as Moutai have apparently raised regulatory eyebrows,” said Chen Xiaopeng, strategist at Sealand Securities Co.
“In addition, the new guidelines on asset management business have triggered expectations of tighter liquidity.”
Economic Information Daily reported on Monday that regulators are expected to tighten controls on consumer loan asset-backed securities, in the latest move to increase oversight of financial products.
Official efforts to cool some of the highest flying blue chips have also weighed on sentiment overhaul, prompting investors to take profits from this year’s heady run-up.
Shares in liquor maker Kweichow Moutai had fallen sharply after the Shanghai Stock Exchange sent a letter to Essence Securities last week, questioning the rationale behind a bullish brokerage report.
However, Kweichow Moutai shares were higher on Monday, rising 0.2 percent after an 8.6 percent fall last week. The stock had more than doubled in value this year through mid-November.
The yield on Chinese 10-year treasury bonds stood at 3.975 percent on Monday, while five-year AAA-rated corporate bonds issued by Jiangsu Communications Holding were quoted at 5.201 percent, up 38.5 basis points since the end of October.
Yields on shorter-term instruments also remain high. AAA-rated three-month commercial paper yielded 4.99 percent, reflecting a rise of nearly 60 basis points in November.
Despite persistently high yields, traders said the bond market was quiet on Monday, though sentiment remained fragile as regulatory tightening keeps borrowing costs elevated and companies start to hoard cash heading into the year-end, when liquidity typically tightens.
“It has been relatively calm today, we’re seeing range-bound trade,” said a trader at a regional bank.
“Traders are hesitating, with no clear view on the direction,” said a fixed-income manager in Shanghai.
“It’s near the year-end, everyone is calculating bonuses so nobody wants to take more risk. Traders may just hope there will be no further drops in the market before the end of the year.”
Markets largely shrugged off data showing profits at China’s industrial firms continued to grow at a robust pace last month despite a slight cooling from a sizzling September.
Profits earned by China’s industrial companies in October rose 25.1 percent from a year earlier, slowing from a 27.7 percent gain in September.
While robust earnings should give China Inc more room to reduce its massive debt - a key government priority - a Reuters analysis shows the debt pile at listed Chinese firms is still climbing, with levels at the end of September growing at the fastest pace in four years.
Highlighting the size of the problem and the potential drag on future economic growth, debt servicing costs have gobbled up about a fourth of state-owned firms’ revenues in the last few quarters, and higher interest rates could see that burden grow.
China’s yuan inched up against the dollar on Monday, but gains were capped as companies increased their purchases of the U.S. currency, traders said.
The onshore spot yuan opened at 6.5970 per dollar and was trading at 6.5992 at 0438 GMT.
Writing by Andrew Galbraith; Additional reporting by Samuel Shen, Luoyan Liu and Winni Zhou; Editing by Kim Coghill