Chinese stocks tumbled, capping their worst week since the global financial crisis in 2008, amid mounting concern that the nation’s longest bull market has propelled valuations to unsustainable levels.
The Shanghai Composite Index sank 6.4 percent to 4,478.36 at the close on Friday. The gauge lost 13 percent this week, entering a correction after falling more than 10 percent from its June 12 high. About 400 Shanghai shares fell by the daily limit as a gauge of volatility jumped to the highest since 2009.
Strategists at BlackRock Inc., Credit Suisse Group AG and Bank of America Corp. all issued bubble warnings this week after the market value of Chinese shares jumped by more than $6 trillion in 12 months. Fueled by record numbers of novice investors and an unprecedented $363 billion of margin debt, the median stock on Chinese bourses is valued at 95 times earnings, versus 68 at the height of the nation’s equity mania in 2007.
“The tide is going to go out, and there’s going to be a lot of people without their swimming trunks on,” Ewen Cameron Watt, chief investment strategist at BlackRock, which oversees $4.8 trillion as the world’s biggest money manager, said in an interview on Bloomberg Television in London. “We’re seeing it deflating quite rapidly.”
The Shanghai Composite’s bull market, which turned 928 days old Friday, is the longest since Chinese bourses opened for trading in 1990 and more than five times the average lifespan of previous rallies. The gauge has tumbled at the fastest pace among global equity indexes this week, after a world-beating 152 percent gain in the previous 12 months.
“The market is becoming ever-more volatile,” said Michael Every, the head of financial markets research at Rabobank Group in Hong Kong. “Ultimately, today is a taster of what is surely to come.”
The Hang Seng China Enterprises Index of mainland companies in Hong Kong entered a correction on Tuesday. It fell 0.6 percent Friday, while Hong Kong's benchmark Hang Seng Index rose 0.3 percent. The CSI 300 Index of the biggest Chinese shares dropped 6 percent.
Gauges of technology, phone and industrial companies in the CSI 300 slumped at least 15 percent this week, the worst performers among 10 industry groups. The small-cap ChiNext Index, dominated by technology stocks, plunged 5.4 percent on Friday, extending losses to 17 percent since hitting a record high on June 3.
Leshi Internet Information & Technology (Beijing) Co. tumbled 10 percent, trimming this year’s rally to 273 percent. Air China Ltd. and China Eastern Airlines Corp. also plunged 10 percent, while ZTE Corp. dropped 8.5 percent.
Stocks were also weighed down this week by a flood of new share sales and investor disappointment that a reduction in lenders’ reserve-requirement ratios didn’t materialize. Pressure has grown on the central bank to add to two cuts in reserve ratios this year after data last week showed exports and producer prices slumping.
Twenty-five initial public offerings lured an estimated 6.7 trillion yuan ($1.1 trillion) of bids, according to a Bloomberg survey of forecasters. The subscriptions, including Guotai Junan Securities Co., may have tied up the most funds since January 2014, when China resumed new share approvals, according to China International Capital Corp.
The decline in Chinese stocks is a buying opportunity because the government will act to keep the bull market intact, said JPMorgan Chase & Co. strategist Adrian Mowat. Authorities can reduce the pace of IPOs, clarify margin trading rules or encourage President Xi Jinping’s plan to build overseas transport links to boost investor sentiment, he said.
“Policy makers will step in if the market correction gets beyond a comfortable level,” Mowat, the chief Asian and emerging-market equity strategist at JPMorgan, said in an interview in Hong Kong. “I would imagine if the correction continues next week you will hear something reassuring.”
Mainland markets will be closed on June 22 for a national holiday. The following day, HSBC Holdings Plc and Markit Economics are scheduled to release a preliminary manufacturing index for June, known as the flash PMI. The index may be at 49.4, signaling a contraction, according to the median estimate of a Bloomberg survey.
— With assistance by Shidong Zhang