A sell–off in Chinese shares overnight in Asia extended the rout in U.S. markets on Tuesday, with a gap in volatility indexes signaling further weakness ahead, as tighter government regulations in China led investors to dump holdings.
The iShares China Large-Cap ETF , which tracks an index of large Chinese companies that trade on the Hong Kong Stock Exchange, slid 3.3% and the Invesco Golden Dragon China ETF, which mimics a Nasdaq index of the same name, fell 5.4%. The two ETFs closed at lows last seen in June 2020.
Among well-known Chinese multinationals, e-commerce oriented Alibaba Group Holdings Ltd fell 3.0% and internet services company Baidu Inc lost 2.8%.
The dive could get deeper as the gap between the Cboe China ETF Volatility Index and the Cboe Volatility Index – the so-called Wall Street “fear gauge” – grew to a record high 30 points.
Past instances when the two volatility gauges have diverged widely have heralded further weakness for Chinese stocks, according to Chris Murphy, co-head of derivative strategy at Susquehanna International Group.
What started off as a sell–off in equities bled into fixed income and foreign exchange markets earlier in Asia, sending the yuan falling through psychologically significant levels and pushing Chinese 10-year government bond futures down 0.35%, as traders scrambled to come to terms with the rout.
The rout came after a shakeout on Monday spurred by new rules reining in China‘s $120 billion private tutoring sector, sending some shares plunging more than 45%, and new regulatory moves targeting technology and property.
Adding to broader concerns about the economic outlook, profit growth at China‘s industrial firms slowed for a fourth straight month in June, as high raw material prices weighed on factories’ margins.