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Chinese Stocks Stagger to End of Rough Week Chinese Stocks Stagger to End of Rough Week
(about 9 hours later)
HONG KONG — Chinese stocks plunged on Friday, capping their worst week in years and prompting the perhaps inevitable question: Has the country’s tremendous stock market rally finally come to an end? HONG KONG — Chinese stocks plunged on Friday, capping their worst week in years and prompting the perhaps inevitable question: Has the country’s tremendous stock market rally finally come to an end?
The benchmark Shanghai share index — which has more than doubled in the past year — fell 6.4 percent on Friday. From their peak a week earlier, Shanghai stocks have now lost 13.8 percent — their worst weekly decline in seven years. The main index for the Shenzhen stock market, which tends to include smaller, nonstate companies, fell 12.7 percent for the week. The benchmark Shanghai share index — which has more than doubled in the last year — fell 6.4 percent on Friday. From their peak a week earlier, Shanghai stocks have now lost 13.8 percent — their worst weekly decline in seven years. The main index for the Shenzhen stock market, which tends to include smaller, nonstate companies, fell 12.7 percent for the week.
Although China’s frothy markets have for months displayed signs of being in a bubble, naysayers have so far been proved wrong. Shanghai stocks have approached double-digit declines twice this year — both times in May — but quickly regained their footing to continue their ascent.Although China’s frothy markets have for months displayed signs of being in a bubble, naysayers have so far been proved wrong. Shanghai stocks have approached double-digit declines twice this year — both times in May — but quickly regained their footing to continue their ascent.
Before the sell-off on Friday, mainland stocks had risen to nearly $10 trillion in market value, up from $3 trillion a year ago and second only to the value of stocks in the United States, in terms of overall size.Before the sell-off on Friday, mainland stocks had risen to nearly $10 trillion in market value, up from $3 trillion a year ago and second only to the value of stocks in the United States, in terms of overall size.
So some analysts said it was too soon to assume the rally had run out of steam.So some analysts said it was too soon to assume the rally had run out of steam.
“I would say we are in for a very sharp, volatile correction,” said Hao Hong, the chief China strategist at Bocom International in Hong Kong. “But I think it’s too early to say everything is finished and this is the peak.”“I would say we are in for a very sharp, volatile correction,” said Hao Hong, the chief China strategist at Bocom International in Hong Kong. “But I think it’s too early to say everything is finished and this is the peak.”
China’s stock rally has come as a sharp contrast to the nation’s slowing economy and is all the more precarious because it has been driven by unprecedented levels of margin financing, or investors’ taking on debt to trade in shares.China’s stock rally has come as a sharp contrast to the nation’s slowing economy and is all the more precarious because it has been driven by unprecedented levels of margin financing, or investors’ taking on debt to trade in shares.
At the same time, China’s efforts at financial overhauls have helped lift its domestic stock markets — which are still broadly closed to foreign investors — onto the global stage.At the same time, China’s efforts at financial overhauls have helped lift its domestic stock markets — which are still broadly closed to foreign investors — onto the global stage.
Last week, MSCI, a company that compiles indexes widely tracked by money managers around the world, said it could soon add China’s domestic shares to its benchmarks.Last week, MSCI, a company that compiles indexes widely tracked by money managers around the world, said it could soon add China’s domestic shares to its benchmarks.
Analysts pointed to several factors that contributed to the sell-off this week. Among them was a large number of companies seeking initial public offerings in the mainland, which had the temporary effect of locking up about 5 trillion renminbi, or more than $810 billion, in investors’ funds. Additionally, Monday is a public holiday in the mainland — the traditional Dragon Boat festival — and many investors probably sought to cash out of their riskier trades, given the recent market volatility.Analysts pointed to several factors that contributed to the sell-off this week. Among them was a large number of companies seeking initial public offerings in the mainland, which had the temporary effect of locking up about 5 trillion renminbi, or more than $810 billion, in investors’ funds. Additionally, Monday is a public holiday in the mainland — the traditional Dragon Boat festival — and many investors probably sought to cash out of their riskier trades, given the recent market volatility.
“The culprit of this very sharp correction is very high valuations and a very strong run-up in the market before this — this was an accident waiting to happen,” Mr. Hong said.“The culprit of this very sharp correction is very high valuations and a very strong run-up in the market before this — this was an accident waiting to happen,” Mr. Hong said.
China’s central bank has already cut interest rates three times since November, and most economists expect it to take some form of further easing action in the coming weeks or months. China’s central bank has already cut interest rates three times since November, and most economists expect it to take some form of further easing action in the coming weeks or months. At the same time, the central bank is wary that such steps may simply end up inflating share prices.
At the same time, the central bank is wary that such steps may simply end up inflating share prices. That would, however, also have the positive effect of making it easier for companies to raise funds, which they can use to invest, potentially increasing growth. “There’s not such the dichotomy between the real economy and stock market as we are sometimes led to believe by the debate in China,” Louis Kuijs, the chief economist for greater China at Royal Bank of Scotland, said this week. “But definitely, policy makers have to be seen as not making things worse in terms of stimulating the stock market while the economy remains very weak.”
“There’s not such the dichotomy between the real economy and stock market as we are sometimes led to believe by the debate in China,” Louis Kuijs, the chief economist for greater China at Royal Bank of Scotland, said this week in a telephone interview. “But definitely, policy makers have to be seen as not making things worse in terms of stimulating the stock market while the economy remains very weak.”