China’s stock market capping experienced its worst week since 2008, amid mounting concern that the nation’s equity bull market has propelled valuations to bubble-like levels.
On Friday, June 19th, the Shanghai Stock Exchange Composite Index tumbled a record 6.4%, while the Shenzhen Stock Exchange Composite Index plummeted 5.9%. Over the week, the Shanghai Composite dropped a staggering 13%, marking its worst decline since 2008.
Nearly 1,000 stocks on the two exchanges fell 10% during Friday’s session—the maximum decline allowed by Chinese regulators. The panic has spread over to almost every industry on the market. The ChiNext Index, which tracks innovative and fast-growing companies, dove 5.4%, after losing 6.3% on Thursday.
Changing Sentiment and Investing Climate Aggregated by Margin Debt
Market analysts blamed Friday’s crash on profit taking. Large institutional investors have made their money during the past year’s bull market and are now getting out. Corporations are also decreasing the holding of their own shares.
Analysts also blamed the stock market panic on high leverage. Over the past year, a large number of margin accounts were created in the Chinese stock market. The total amount of margin debt was valued at a whopping $358 billion. This amount of margin debt elevated sell-off risks as investors would have to sell their shares to cover margin calls during market downturns.
The media’s view on the stock market has also been changing. People’s Daily, one of the official publications in China, has been warning investors about the risks in addition to excessive enthusiasm in the stock market. The country’s economy also appears to be slowing, after a number of disappointing export and manufacturing data were published earlier in the week.
Economists will be watching a number of trade and manufacturing reports scheduled to be published in the next few weeks. That will give investors a clue as to whether or not China’s economy is slowing down.