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Stocks

China shares lead regional losses

HONG KONG/TAIPEI -- Asian stocks suffered another selldown and China saw its shortest trading day on Thursday, as fears spread across the region over a yuan devaluation and a grim outlook for the world's second largest economy.

     Trading in Shanghai and Shenzhen was stopped less than half an hour after markets opened when the CSI 300 Index of the largest listed companies fell over 7%, triggering the new "circuit breaker" mechanism for the second day this week. A similar crash on Monday also triggered the circuit breaker on the first day of its implementation.

     The benchmark Shanghai Composite Index ended 7.3% lower at 3,115.89 points and the Shenzhen Composite Index fell 8.3%.

     The falls rippled across Asia. Hong Kong's Hang Seng Index ended the session 3.1% lower at 20,333.34, and other major benchmark indexes in Tokyo, Seoul, Kuala Lumpur, Singapore, Bangkok, and Mumbai also headed south.

     In just four days of trading so far in 2016, Shenzhen's Chinext Index, comprising mainly start-ups, has already lost 17%. The Shanghai Composite fell 12%, while Hang Seng and Taiwan's Taiex also lost 7% and 6%, respectively, over the same period.

     Among the Asia300 companies, shares in Greenland Holdings, a Shanghai-listed real estate company, dropped 21% since the beginning of the year. Hong Kong-listed mainland shares such as Shanghai Electric Group, ZTE and China Communications Construction also lost over 15%.

     Analysts expect the mainland Chinese A-share market to remain volatile as investors were  spooked by a sharp devaluation of the yuan on Thursday. The People's Bank of China surprised investors by lowering the official midpoint rate to 6.5646 yuan per dollar, the weakest since March 2011 and the largest of such moves since August.

     Other factors such as a shift to a new initial public offering mechanism alongside disappointing Purchasing Managers' Index readings on Monday also exacerbated investor worries.

     "The central bank is clearly having a greater tolerance for yuan exchange rate volatility than last year," said Larry Hu, head of China economics at Macquarie Securities Group. "But if the capital outflow is too significant, so that it leads to a capital flight, the PBOC will intervene."

     Commenting on the trading halt on Thursday, Tom Rafferty, Asia economist at the Economist Intelligence Unit, said: "Beijing has its work cut out to salvage its reputation for competent economic management after today's events."

     The Chinese authorities are now faced with a dilemma of either pursuing supportive measures to prop up stocks like they have done since mid-2015 or giving in to market pressures. "Past evidence suggests they will opt for the former approach, but in our view this will at best only delay the correction," Rafferty added.

     Policymakers have since stressed the need to stabilize the yuan and attributed the currency's fall to speculative activities. "They only lead to abnormal fluctuations of [the yuan] exchange rate and send misleading price signals to the market," said China Foreign Exchange Trade System, a division of the PBOC in a statement on Thursday morning.

     Market participants attribute the recent market volatility to the circuit-breaker system. It works by imposing a 15-minute market freeze when the CSI 300 Index falls 5% and then closing down the market altogether if the drop breaches 7%.

     Erwin Sanft, head of China strategy at Macquarie, said otherwise, adding that this structural mechanism should reduce the need for "ad hoc intervention." He added that "a lot of international investors would be happy with it."

     However, the China Securities Regulatory Commission said late Thursday night it was suspending the newly introduced circuit breaker mechanism as of Friday trading. Deng Ke, spokesperson for the securities regulator, said "weighing the pros and cons, the negative impacts are bigger than its positive effect." The mechanism lasted for only four trading days.

     The Shanghai Composite is expected to be range-bound between 3,000 and 3,500 points in 2016, according to Macquarie, down more than 40% from its peak in July. China's slowdown and the lack of positive catalysts will continue to weigh on the equity market.

     "It's coming to the bottom of our range pretty quickly this week," Sanft told reporters on Thursday. "If we were to see another day like today, that [would be] a level [when] we start to get excited about the value in the market."

     For Nomura, the sharp downfall has already breached its forecast of the expected trading range for 2016.  Nomura forecast the trough of the CSI 300 to be 3,550, but the index closed over 7% lower than that level at 3,294 on Thursday. 

     Wendy Liu, head of China equity research, said after trading hours that she "underestimated the market's fear with the geopolitical concerns," but did not clearly say if she would revise her forecast.

     Taiwan's benchmark Taiex also declined on Thursday, but on a smaller scale, down 1.73%. It has lost 11.34% since its peak in November 2015.

     "The sell-off in Taiwanese stocks was mostly triggered by weak demand in Apple's iPhones, and worries that the yuan will depreciate further," said Huang Wen-ching, an analyst at Taishin Securities Investment Advisory in Taipei.  

     Shares of Apple's suppliers have tumbled the most as the company scaled back orders for its iPhones. Most institutional analysts have trimmed estimates for iPhone sales. 

     "We maintain a negative view for Apple's supply chain as iPhone shipments are expected only be 90 million units, a decline of 17% on the year in the first half of 2016," said Arthur Liao, an analyst at Fubon Securities, "We do not expect any good news from Apple's supply chain until the end of the second quarter this year."

     Metal casing supplier Catcher Technology stock plunged 10% to 226 New Taiwan dollars ($6.73) a day after it forecast a dim outlook for the first half of 2016. Shares in LARGAN Precision, a key camera module maker for Apple's iPhones, fell 6.63% to NT$1,830. LARGAN'S market capitalization has halved from the peak of its shares at NT$3,710 apiece in July 2015.

     Shares in Taiwan Semiconductor Manufacturing Co. (TSMC), iPhone's core processor chip maker, shed 1.85% to NT$133. The stocks of iPhone assemblers Pegatron and Hon Hai Precision Industry fell 3.24% and 0.89%, respectively. Force touch supplier TPK Holding's shares closed 1.77% lower as well.

     MediaTek, the largest mobile phone chip provider to China, saw its shares fall 9.25% amid concerns of fierce price cuts that would drag down its profit margin and diminish demand for electronic devices. Local media also reported Thursday that the company would slash costs by cutting 10% of executive salaries to adjust for the slowdown. 

     The banking sector was also hit on Thursday, over concerns that an even weaker yuan could hurt Taiwan's competitiveness and subsequently its economy. Two of Taiwan's largest financial conglomerates, Cathay Financial Holding and Fubon Financial Holding, have seen their stocks fall 1.73% and 3.29%, respectively.

     "There are so many uncertainties in the market," said Shawn Hsueh, an analyst at Yuanta Investment Consulting. "The market turmoil in Taiex would not come to an end before the depreciation of the yuan stops and volatile global market stabilizes."  

Asia300: Top 10 losers and gainers since the beginning of the year

LOSERS

Change, %

Greenland Holdings          

-21

LARGAN Precision             

-19

TPK Holding         

-19

Catcher Technology

-18

MediaTek            

-18

Bloomberry Resorts          

-15

Shanghai Electric Group   

-15

ZTE        

-15

PTT Exploration & Production        

-15

China Communications Construction           

-15

GAINERS

 

Hanmi Science    

13

Indofood Sukses Makmur

9

Celltrion

9

Wijaya Karya       

8

AirAsia   

8

Vingroup             

5

AmorePacific Group

4

San Miguel          

4

Lotte Chemical

4

Sumber Alfaria Trijaya     

3

Nikkei deputy editor Kenji Kawase in Bangkok contributed to this story

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