Asia Enters Bear Market

The major Asian indices officially entered a bear market Tuesday, as a recent spread of speculative short positions led to panic selling, mainly due to hedge funds unloading heavily on margin calls.

In Hong Kong, markets plunged. The Hang Seng experienced the biggest two-day decline since the 1997 Asian contagion, ending 2061 points, or 8.7% down, at 21,757. Some dealers said technical support levels were increasingly irrelevant now, but the index is expected to find support at 20,000 points after the index failed to bounce at 22,000. Volumes were up 32.6% from yesterday, at HK$155.76 billion, or $19.95 billion.

After holding up strongly in recent weeks, China followed the island's lead, plunging 354 points, or 7.2%, to 4559. The Nikkei dropped 753 points, or 5.7%, to 12,573.

The big Asian selloff began last Wednesday, when the Hang Seng lost 5.4% in one day, the most since Sept. 11, 2001, and it continued Monday, when it declined 5.5%. In the last five days, the Hang Seng has shed 17.8% of its value, and now lies 16% away from a 52-week low.

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It is thought that the selloff is a result of initial short selling by traders, who saw weakness in key technical support levels last week, and once prices were pushed below the 23,400-level, hedge funds were forced to cover margin calls, leading to further declines. After that, short sellers targeted other Asian indices, say market participants.

"Bids have thinned out, which is exacerbating falls even more, despite market turnover having dropped for 3 consecutive days," says Steven Wong, a trader for Daiwa Securities in Hong Kong.

"This is definitely margin calls, and panic selling now," says Andy Lam, associate director of Harris Fraser in Hong Kong. "There could be more as fund managers are raising cash redemptions."

Lam points out that since this week's selloff in Asia has tracked a decline in Dow futures of around 600 points, if the Dow Jones Industrial Index ends less than 500 points lower, Asia will rebound sharply Wednesday.

Insurers, which have borne the brunt of the selling in the last week, fared worst. China Life Insurance(LFC Quote) dive-bombed 16%, to HK$27.60, while shares in Ping An(PIAIF Quote) plummeted 12.5%, to HK$59.55. In Shanghai, Ping An ended at 79.55 yuan, after being suspended in accordance with a rule that states shares can only fall a maximum of 10% in one day.

Among other financials, HSBC Holdings(HBC Quote) plunged 8.10%, to HK$104.40, ending at a 52-week low, while Hong Kong Exchanges(HKXCF Quote) tumbled 9.9%, to HK$156.30.

Telecoms dived too, though remain about 30% above yearly lows. China Netcom(CN Quote) was off 15%, to HK$19.96, while China Telecom(CHA Quote) finished 12% lower, at HK$5.33. China Unicom(CHU Quote) dropped 10.4%, to HK$14.80, and market leader China Mobile(CHL Quote) slipped 7.5%, to HK$108.90.

Even if markets in New York hold up, market participants expect Chinese "N" shares like Baidu.com(BIDU Quote) and Sohu.com(SOHU Quote), and Sina(SINA Quote) to decline dramatically, as they catch up with the Asian selloff after markets in the U.S. were closed for Martin Luther King day Monday.

"Chinese shares are falling hard, because a lot of investors realize that it is still the best performing market year to date, so they are selling," says Lam.

Energy shares in Shanghai led the index to its biggest one-day decline since February 2007. PetroChina(PTR Quote) lost 4.7%, to 26.18 yuan, while China Shenhua Energy(CUAEF Quote) slumped 8.2%, to 55.59 yuan. China Petroleum and Chemical(SNP Quote) shed 8.7%, to 18.25.

In Japan, even a stabilizing of the yen price, and recent declines in share values, couldn't hold back a sharp drop in equities. The yen rose mildly vs. the dollar, from 106.80 to 106.33 by the end of the Asian trading session.