Junk Stock Cleanup Effort Leaves Investors on Edge

Concerns about a regulatory clean-up of junk stocks and doubts over whether the economy has bottomed out may continue to dog trading in China on Tuesday.

Flag of the People's Republic of China
Eriko Koga | The Image Bank | Getty Images
Flag of the People's Republic of China

The Shanghai Composite Index fell 0.89 percent on Monday to a 41-month low of 2107.63. Other indexes fared worse — the index for foreign-denominated B-shares fell 5.8 percent on delisting fears, while the startup board lost over 2 percent.

Market Factors:

China once again urges more private investment in previously state-dominated sectors. Chinese Premier Wen Jiabao chaired a cabinet meeting Monday that called for private investment in a series of important projects in fields including railway, utilities, energy, telecom, finance, and also promised the creation of a fairer environment towards private investment.

"The cabinet meeting urged various regions and government departments to take candid and effective measures to implement policies to create an environment that is fair, transparent and predictable to all market players including the private ones," the central government said in a statement on its website, www.gov.cn.

The push to open state controlled industries leaves some analysts skeptical and anticipating resistance from state-backed giants, which enjoy preferential access to finance and government contracts.

"I'm not quite optimistic about the short-term results," said Zhiwei Zhang, Nomura's China economist in Hong Kong.

Stocks to Watch:

Special Treatment (ST) Shares - The Shenzhen stock exchange said it has no plans to launch a risk warning board like the Shanghai bourse. News of the board (which would cap upside at 1 percent, but keep downside limit at 5 percent) led to almost all ST shares in Shanghai falling limit-down on Monday.

Suning Appliance - The appliance retailer issued preliminary earnings showing a 29.5 percent drop in first-half profit as appliance sales fell.

Vantone Property, Deluxe Family, Wolong Real Estate - A trio of developers have issued first-half results — Vantone says first-half net profit almost tripled as it diversified into commercial real estate. Deluxe Family posted a 93 percent plunge in first half-earnings, while that of Wolong Real Estate sank 48 percent.

Coming Up This Week:

TUESDAY: Japanese Housing Starts, Indian Interest Rate Decision, Korean Consumer Price Index, Korean Trade Balance, Chinese Manufacturing PMI, Australian Home Price Index
WEDNESDAY: Indonesian Trade Balance, Indian Trade Balance, Singaporean PMI, Japanese Monetary Base, Australian Trade Balance, Australian Retail Sales
THURSDAY: Hong Kong Retail Sales, Chinese HSBC Services PMI
FRIDAY: Indian HSBC Services PMI, Indian Foreign-Exchange Reserves

—By Cheng Lei, Special to CNBC.com; Reuters contributed to this story