By Chao Deng
China shares are headed for their worst month in over two years
on Friday, after confidence in a government-led recovery wavered
earlier this week, knocking shares lower.
The Shanghai Composite Index is down 1% at 3666.47. The smaller
Shenzhen Composite fell 0.3% to 2122.36.
China's main stock index is on track to lose 9% this week, and
is down 13% month to date, its weakest monthly performance since
June 2013. That would make Shanghai one of the worst-performing
indexes globally this month.
In Hong Kong, the Hang Seng Index is up 0.4%, and an index of
Chinese companies listed in the city rose 0.5%. Still, Hong Kong
shares are on track to lose 6% this month, marking its worst
monthly performance since September.
On Friday, China's securities regulator announced it had
launched a probe into automated trading and restricted 24 stock
accounts suspected of "influencing securities trading prices,"
according to its official website. The investigation seeks to root
out possible causes of the recent volatility that has rattled
China's stock market.
China shares have been reeling since an 8.5% loss on Monday, the
biggest daily decline in more than eight years, when investors
dashed for the exits on worries that government-backed funds might
wind down market support.
Shanghai is down 28% since its peak in mid-June, despite fresh
rhetoric from the securities regulator that it wouldn't pull away
from buying shares. The index has rebounded by about just 4% since
the deepest point of the selloff on July 8.
Fluctuating confidence about the government's role in the market
has led to wild intraday swings in recent days. While that's
spooked some investors, others have seen an opportunity to chase
short-lived surges while the government appears to be buying
in.
"The game between speculative funds and state funds adds to
volatility on the market," said Miller Zhao, analyst at Trade
Blazer, a Shanghai-based private-equity firm. "To put in plain
language, speculative investors want to take profits from
government-backed funds."
Analysts warned of further volatility in Friday's afternoon
trade ahead of Chinese official manufacturing data Saturday. An
early gauge of manufacturing last week, which hit its lowest level
in 15 months, could throw doubt on the health state-owned
enterprises, according to analysts at IG. "This question might see
negative trading in the afternoon as investors close out positions
to mitigate that possible risk," wrote IG analyst Evan Lucas in a
note.
Fears that China's selloff could spiral beyond the domestic
equities market has unsettled the rest of the Asia region in recent
weeks. Investors have withdrawn $12.1 billion from emerging-market
Asian equity funds in the last three weeks ending July 29, the
largest three-week outflow in more than a decade, according to ANZ
Research and EPFR Global, a fund data provider. The withdrawals
also come as investors prepare for the Federal Reserve to raise
interest rates in the U.S. later this year.
Some $1.8 billion of that outflow has come from China, which has
suffered its deepest market selloff since the global financial
crisis.
Signs of a deepening slowdown in China also have pushed
currencies in Asia to multiyear lows this month. Currencies are
down, on average, 2% for the month against the U.S. dollar, while
the Australian dollar has fallen over 5% over that period and New
Zealand's dollar is down 2.8%.
"[A]n emerging market selloff will likely be the main theme in
[the second half], as the Fed prepares to normalize when China soft
lands," said Stephen Jen, managing partner at London-based hedge
fund SLJ Macro Partners. "There is very little that the
emerging-market countries can do to avert a further sharp selloff
in their currencies."
Declines in currencies, in part driven by sluggish global demand
and a broadly stronger U.S. dollar, have failed to give a boost to
exports. Last week, China signaled it would allow its currency to
move more freely, by widening the yuan's trading ban, another
factor pressuring the region's economies as Chinese goods could
become more competitive.
Commodities are another casualty of a stronger U.S. dollar and
expectations of a rate increase. Many materials are priced in the
currency, making them more expensive for foreign buyers as the
dollar strengthens. Higher interest rates in the U.S. also give
investors incentive to shift to other assets, as commodities don't
provide any income and cost money to hold.
Gold has sank to five-year lows, and is currently trading down
0.4% at $1083.70 a troy ounce in Asia.
Concerns about oversupply and weak demand in China, one of the
world's biggest commodities consumers, have weighed on oil prices
in recent months, too. Brent crude, the global oil benchmark, is
down 21 cents to $53.10 in Asian trade, ahead of a U.S. government
supply report on Friday in the U.S.
Stocks elsewhere in the region were mixed, with the Nikkei Stock
Average flat, as disappointing consumer-spending data offset a
better-than-expected inflation reading.
Australia's S&P ASX 200 was up 0.3% and South Korea's Kospi
was down 0.5%. Overnight, U.S. economic output in the second
quarter came in slightly slower than expected at an annualized
2.3%, another piece of patchy data that casts uncertainty over the
timing of an expected rise in U.S. interest rates.
In corporate news, shares of Noble Group Ltd. slipped for a
second-straight day--falling as much as 22% from Wednesday's
close--as short sellers pile in on the commodities trader, which
earlier this year faced criticism of its accounting practices. The
company has denied any wrongdoing. Shares are down about 10%
Friday.
Anjani Trivedi and Jake Maxwell Watts contributed to this
article.
Write to Chao Deng at Chao.Deng@wsj.com