* Shanghai, Shenzhen stocks plunge 5 percent as bears rule
* Sudden drop in China hits Asia shares 2nd time in 3 days
* Commodities, Australian dollar drop on equity weakness
* Chinese banks on tap to report results
(Repeats to more subscribers)
By Kevin Plumberg
HONG KONG, Aug 19 (Reuters) - Chinese shares slumped 5
percent on Wednesday and the rest of Asia and Europe followed
on growing fears that global investors were pulling the plug on
a 6-month rally amid doubts about a global economic recovery.
Shanghai stocks <> tumbled to a two-month low on
disappointment that authorities were not taking steps to
support the market amid increasingly heavy losses.
A heady run-up in Chinese stocks this year has become
firmly linked with global investors' desire to take on more
risks again for higher returns. The sharp reversal in China has
badly shaken confidence, even though some form of correction
had been widely expected after share prices ran up so fast.
European stocks <> fell 1 percent in early trade
while U.S stock futures <SPc1> down 0.9 percent.
Oil and metal prices and cyclical currencies like the
Australian dollar also fell as the selloff in China gained
pace.
Shanghai shares slumped as much as 5 percent at one point
before settling 4.3 percent lower, taking their losses to
around 20 percent in just two weeks -- meeting the definition
of a bear market.
Even with the latest reversal, the Shanghai index is still
up some 53 percent so far this year.
Many international investors had hoped China would lead a
global recovery as its economy picked up steam again. While its
recovery trend looks intact, signs abound that consumer demand
and company profits in the rest of the world remain weak,
impeding a broad recovery.
"I'm keen not to get on the wrong side of a correction at
this point," said Andrew Orchard, strategist with Royal Bank of
Scotland in Hong Kong.
"The conditions for a longer-term bull run are still in
place, after all this whole rally has been about liquidity. But
I think some valuations look overstretched."
The MSCI index of Asia Pacific stocks outside Japan slipped
0.3 percent after being higher most of the day. The materials
sector, which has led the rally in regional markets, was one of
the biggest decliners.
Japan's Nikkei share average <> finished 0.8 percent
lower, hurt by Shanghai's decline and weakness in retailers and
technology stocks, but Sanyo Electric <6764.T> surged as much
as 17 percent after a source said it would sell batteries for
hybrid cars to Toyota. []
POLICY DISAPPOINTMENT
China's three most influential official securities
newspapers published bullish comments on Wednesday seeking to
talk up the stock market.
Short-term trading signals on Chinese stocks have moved
swiftly from reflecting overbought conditions 12 trading days
ago to now being slightly oversold. Still, the correction in
valuations may have further to run.
"Investors are disappointed that regulators failed to take
any concrete steps to support the market, while sentiment is
extremely shaky after the market's tumble over the past two
weeks," said analyst Chen Huiqin at Huatai Securities in
Nanjing.
Bank of Communications <3328.HK><601328.SS>, the country's
fifth-largest lender, will kick off Chinese bank first-half
results on Wednesday, followed by two of the world's biggest
banks by market value later in the week: Industrial and
Commercial Bank of China <1398.HK><601398.SS> and China
Construction Bank <0939.HK><601939.SS>.
Pressure on net interest margins is expected to hurt the
banks' results despite barely receiving a scratch from the
global credit crisis.
The Australian dollar still remained largely shackled to
the whims of Chinese stocks, given the strengthening trade ties
between the countries.
The Australian dollar dropped 0.4 percent in choppy trade
to US$0.8232 <AUD=>, though was still near an 11-month high
around $0.8477 reached on Friday.
The U.S. dollar got a boost from the Chinese market's
weakness after a small dip overnight as Wall Street recovered.
The ICE Futures U.S. dollar index <.DXY> rose 0.3 percent.
Three-month copper traded <MCU3> on the London Metals
Exchange fell 2.3 percent to $5,940 a tonne, while Shanghai
copper dropped 3.3 percent to 46,400 yuan <SCFc3>.
U.S. crude oil for September delivery fell by 0.4 percent
to $68.93 a barrel <CLc1> as equity markets declined. Brent
slid 0.8 percent to $71.73 <LCOc1>.
U.S. stock markets rose around 1 percent overnight,
rebounding from sharp losses on Monday, as better-than-expected
results from big retailers encouraged investors to get back
into the market. []
But analysts remain worried about laclustre consumer
demand. Many firms which have beat or met market expectations
this earnings season have done so by cutting costs, not by
increasing sales.
(Additional reporting by Claire Zhang and Edmund Klamann in
SHANGHAI)
(Editing by Kim Coghill)
