China’s Stock Market Rally Ends Abruptly: Shanghai Composite Down

China Stock MarketChina’s stock market rally stopped dramatically on Thursday, May 28. In one day’s trading, the Shanghai Composite plunged a staggering 6.5%. The Shenzhen Composite also dropped 5.5%.

Until Thursday, the Shanghai Composite had enjoyed a seven-day rally, surging more than 14% to reach its highest level since January 2008.

Thursday’s huge stock market drop could be, in part, due to a sovereign wealth fund dumping shares of China’s major banks.

Shanghai Stock Exchange Composite Index

Chart Courtesy of www.StockCharts.com

Central Huijin Investment Ltd., part of China’s sovereign wealth fund, sold 1.629 billion yuan ($260 million) worth of shares of Industrial & Commercial Bank of China (ICBC), and 1.906 billion yuan ($310 million) worth of China Construction Bank shares.

As a result, the stock price of ICBC dropped five percent on Thursday, while China Construction Bank plunged 5.9%.

On Friday, May 29, the Chinese stock market started with the Shanghai Composite losing as much as four percent in the morning, but it picked up later on, closing only 0.2% down.

Stock Market High, Real Economy Lacks Growth

The crazy rally in the Chinese stock market over the past year does not reflect the fundamentals of its real economy. Since July of last year, the Shanghai Composite index jumped up more than 125%!

Earlier in May, China reported that its factory output, retail sales, and fixed asset investment all missed expectations.

Trade data was even worse. In April, China’s exports dropped 6.4% year-over-year. Imports plunged a more dramatic 16.2%. These suggest demand is weak, both in China and around the world.

To help boost the slowing economy, the People’s Bank of China, the country’s central bank, has lowered its benchmark interest rate three times in six months.