Main­land share plunge splits bulls and bears


When main­land China’s main share in­dex hit a seven-year high two weeks ago, it topped off a run that had seen it soar more than 150 per­cent over the pre­vi­ous 12 months, high among the world’s best per­form­ers.

But in the two weeks since, it has suf­fered a huge re­ver­sal, plum­met­ing nearly 20 per­cent and wip­ing tril­lions of yuan off mar­ket cap­i­tal­iza­tions.

An­a­lysts are di­vided on whether the flood of mi­nus signs on price screens sig­nals the end of the spec­tac­u­lar bull mar­ket, or is merely a tem­po­rary cor­rec­tion in a debt­fu­eled up­ward march.

The bench­mark Shang­hai Com­pos­ite In­dex slumped 7.4 per­cent on Fri­day to 4,192.87, nearly 1,000 points and 18.8 per­cent off its high.

The tech-heavy Shen­zhen Com­pos­ite, which tracks stocks on the main­land’s sec­ond ex­change — tum­bled 7.9 per­cent, tak­ing it 20.3 per­cent down from its peak and putting it into bear mar­ket ter­ri­tory.

On Satur­day main­land China’s cen­tral bank an­nounced in­ter­est rate cuts of 0.25 per­cent­age points and re­duced some re­serve re­quire­ment ra­tios — lim­its on the amounts banks can lend — by 0.50 per­cent­age points.

An­a­lysts say that as well as seek­ing to stim­u­late slow­ing growth, the move was also a re­sponse to the mar­ket tur­moil.

But U.S. in­vest­ment bank Mor­gan Stan­ley has al­ready ad­vised clients to re­frain from buy­ing main­land shares.

Haitong Se­cu­ri­ties strate­gist Zhang Qi was more op­ti­mistic, telling AFP: “I reckon it is a cor­rec­tion in a bull mar­ket. The scale of the cor­rec­tion is quite sig­nif­i­cant now but the time span is not long enough yet” to sig­nal the end of the bull mar­ket.

Mar­gin Calls

Rather than a trans­for­ma­tion in the world’s sec­ond-largest econ­omy or ris­ing cor­po­rate prof­its, the year­long surge in main­land shares has been driven by liq­uid­ity un­leashed by Bei­jing as it looks to bol­ster growth and ac­cel­er­ated by a wall of bor­rowed money.

Much of the funds from the gov­ern­ment’s stim­u­lus mea­sures have found their way into eq­ui­ties, and with the prop­erty mar­ket stag­nant the ris­ing prices have drawn in mil­lions of new in­vestors, even housewives and re­tirees, who share tips from friends and on so­cial media.

They of­ten buy and sell on mar­gin, putting up only a small pro­por­tion of the trade value and bor­row­ing from a bro­ker for the rest.

The prac­tice of­fers big­ger prof­its, but also mag­ni­fies losses.

It can also cre­ate a down­ward spi­ral when prices drop if lenders de­mand in­vestors put in more money to cover their losses — a “mar­gin call” — forc­ing them to sell.

Author­i­ties have warned against ir­ra­tional ex­u­ber­ance, with the rul­ing Com­mu­nist Party’s mouth­piece the Peo­ple’s Daily news­pa­per last month urg­ing in­vestors “not to for- get risks in a bull mar­ket.”

An­a­lysts say the last fort­night’s falls were trig­gered by new re­stric­tions on mar­gin trad­ing and ac­cel­er­ated by grow­ing con­cern about over­val­u­a­tions.

On June 12, the same day the mar­ket peaked, main­land China’s mar­ket reg­u­la­tor banned illegal lend­ing for share pur­chases and lim­ited se­cu­ri­ties firms’ ca­pac­ity to lend to clients.

Soar­ing share prices have also sent price-earn­ings ra­tios into the strato­sphere — the me­dian main­land share now trades on 85 times an­nual earn­ings, lead­ing ma­jor for­eign in­vest­ment firms to warn of a bub­ble.

At the same time, main­land China’s re­stric­tive IPO sys­tem en­hances volatil­ity as it of­fers those lucky enough to se­cure flota­tion shares near-guar­an­teed first-day prof­its.

In­vestors pull funds from the mar­kets to ap­ply for new is­sues — there have been 25 in June — and pour it back in when un­suc­cess­ful.

But even af­ter the latest falls, the Shang­hai in­dex has still more than dou­bled in a year, and there have been other pot­holes in its up­hill path — in per­cent­age terms, Fri­day’s drop was only the big­gest for five months.

Shang­hai Fi­nance Univer­sity as­so­ciate pro­fes­sor Qin Huan­mei blamed the plunge on “way too fast” pre­vi­ous gains, but added that she be­lieved the gov­ern­ment wanted the pos­i­tive trend to con­tinue.

And or­di­nary in­vestors do not want to give up on the prospect of profit.

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