Chinese stocks plunge over bubble fears
Chinese stocks plunged over seven per cent on Friday, with one key index recording its biggest fall since 2008, hit by tight liquidity conditions ahead of the quarter-end and uncertainty over the central bank’s easing policy.
The market is now down over 20 per cent from seven-year highs hit two weeks ago, with selling accelerated by investors rushing to unwind positions built on borrowed money, but investors are divided over whether the boom has come to a bust.
Jiang Chao, strategist at Haitong Securities, said that based on meetings with fund managers over the past week, he believed that institutions were “collectively at a loss” over the direction of the stock market.
“Many people said they’re keen to lock in profit, rather than make profit in the second half, because they have made enough in the first half.”
To allay fears, Chinese Premier Li Keqiang said the economy’s fundamentals were good and major indicators were improving, although the government would strengthen targeted policy adjustments, according to state-owned China Central Television.
China’s annual economic growth slowed to a six-year-low of seven per cent in the first quarter, weighed down by a cooling property sector.
Recent data showed a further loss of momentum heading into the second quarter, although two private surveys showed signs of steadying in June as the government adopted stimulus measures to combat a protracted slowdown.
“Currently China’s economic fundamentals are good. Main economic indicators such as industrial output, investment, consumption, exports and imports have stabilized and showed improvements since May,” Li was quoted as saying.
“Employment is stabilizing and increasing. The economic performance is within a reasonable range.”
The government will strengthen targeted policy adjustments, Li said, adding that China was able to maintain a mid to high growth rate.
The central bank has cut interest rates and bank reserve requirements to lower borrowing costs and encourage more lending, while the government is stepping up fiscal spending.
Any crash would have major implications on Beijing’s push to open up its financial markets, most imminently a plan to link the Hong Kong exchange with China’s smaller Shenzhen bourse.
It could also have implications for the broader economy, given the high level of market participation by retail investors, though Beijing has weapons in its arsenal if it fears too big a knock-on effect.
It has previously used state funds to pick up shares on dips, eased the pace of initial public offerings and used editorials in state media to boost confidence.
“The foundation of the bull market has not materially changed,” Bosera Asset Management Co said in an emailed comment on the market tumble.
A slew of initial public offerings has also bloated the supply of stocks, which fell across the board on Friday.
About 2,000 of the roughly 2,800 listed companies in Shanghai and Shenzhen slumped by their 10 per cent daily limit.
At the close, the key CSI300 index was down 7.9 per cent, its biggest one-day percentage fall since June 2008, while the Shanghai Composite Index tumbled 7.4 per cent.
Traders said the selling accelerated as it triggered margin calls, which forced investors to bail out of stocks bought on borrowed cash.
Morgan Stanley sees Shanghai’s benchmark index falling between two and 30 per cent from current levels over the next 12 months, citing heavy equity issuance, weak corporate earnings, demanding valuations and excessive levels of margin financing.