SHANGHAI (Reuters) – Chinese stocks slipped further on Friday after the biggest selloff in months the previous day, with fresh government steps to reduce financial risks and a rout in the bond market sapping investors’ confidence.
The blue-chip CSI300 Index .CSI300 ended the morning down 0.8 percent at 4,069.00 points, putting it on track for its worst two days of trading since May last year.
It had tumbled nearly 3 percent on Thursday, its worst one-day loss in nearly 18 months.
The Shanghai Composite index .SSEC fell 0.6 percent to 3,332.27, after skidding 2.3 percent the previous day in its worst performance since December.
Equity investors remained on edge over further regulatory clampdowns and rising corporate borrowing costs, even though the benchmark 10-year treasury bond yield CN10YT=RR pulled back slightly from a three-year high of 4.03 percent on Thursday and bond futures edged up 0.3 percent CFTH8.
The yuan currency CNY=CFXS traded around five-week highs on the back of the weaker dollar.
Stocks dove on Thursday amid an extended bond selloff, and following new policies aimed at curbing micro-lending and tightening regulation of asset management businesses – both of which were seen as likely to eat into liquidity.
Chinese stocks have been on a tear in the second half of the year, and analysts said some investors were selling to lock in profits.
Some of the new asset management proposals “target investment firms that borrow short-term funds to invest in longer-term debt. Such a strategy is risky, given the high leverage ratio,” economists at DBS Bank said in a note this week.
The yield on 5-year AAA corporate debt AAAIFR5YY=CDC rose to its highest level in more than three years amid the selloff.
“The government’s determination to reduce leverage has not been fully priced in by the market yet,” said Gu Weiyong, chief investment officer at bond-focused fund house Ucom Investment Co, adding that stock investors had been particularly slow to react.
“Shadow banking had been a big supplier of liquidity to risky assets, so the reallocation of money to be triggered (by the new rules) will have a big impact on asset prices.”
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