China Stocks Plunge Most Since 1996 as Bubble Warnings Rise

China’s stocks capped their steepest two-week plunge since December 1996 as investors who use borrowed money to buy equities cut holdings and concern grew that valuations were excessive.

The Shanghai Composite Index sank 7.4 percent on Friday, taking its decline from its June 12 high to 19 percent, on the cusp of a bear market. Technology, industrial and material companies led declines in the two-week period, with Neusoft Corp., China Railway Construction Corp. and Hainan Mining Co. tumbling more than 30 percent.

Strategists at BlackRock Inc., Credit Suisse Group AG and Bank of America Corp. this month warned the nation’s equities were in a bubble. The median stock on mainland exchanges is valued at about 85 times earnings -- higher than when the market peaked in October 2007 and compared with a multiple of 20 for the U.S.

“We suspect there will be will be some more forced sales in the coming few days happening in the market,” Steve Yang, China equity strategist at UBS Group AG in Shanghai, said Friday in a phone interview. “It’s probably not a wise time to buy at the current stage.”

A day after the stocks plunge, China’s central bank cut its benchmark lending rate to record low and lowered reserve-requirement ratios for some lenders. Economists at Everbright Securities Co., Mizuho Securities Co. and UBS AG said the monetary easing was likely in reaction to the equities slump.

The declines have turned China’s stock market from the world’s best performer to the worst. About 950 of the 1,105 members on the Shanghai Composite have declined since June 12. Before then, only two companies had fallen this year.

Bull, Bear

Indexes of technology shares and smaller companies, which led China’s world-beating rally through mid-June, both entered bear markets Friday. The ChiNext index slid 25 percent in the two-week period, including a record 8.9 percent plunge Friday to meet the common definition of a 20-percent bear-market decline.

Outstanding margin debt on the Shanghai Stock Exchange dropped for a fourth day on Thursday to 1.42 trillion yuan ($229 billion), the longest stretch of declines since before the weeklong lunar new year holidays in February.

“People at work talk about their stock investment all day, debating whether the market has exited a bull run and entered bear market,” said Liu Chang, 28, who works in the tobacco industry in Wuxi, near Shanghai. “People who are not mentally strong enough have exited the market.”

The Shanghai gauge has surged 106 percent over the past year as margin debt climbed to a record and investors speculated monetary stimulus will revive the weakest economic expansion in more than two decades.

Rate Cut

In the fourth reduction since November, the one-year lending rate will be reduced by 25 basis points to 4.85 percent effective June 28, the People’s Bank of China said on its website Saturday.

“A strong monetary easing at this point of time suggests it relates mostly to the plunge in the stock market,” said Xu Gao, chief economist at Everbright Securities in Beijing. “There is a risk of collapse in China’s stock market which has substantial margin trading and leveraged funds and the government aims to reduce that risk.”

The stocks favored most by margin traders at the height of China’s boom in mid-June have since tumbled 26 percent. The benchmark index has had nine straight sessions of intraday swings exceeding 2 percent.

Guotai Junan

Initial public offerings outperformed during the period. Shanghai Baosteel Packaging Co. has surged 274 percent since its June 10 IPO, while China National Nuclear Power Co. more than quadrupled since its June 9 listing.

Guotai Junan Securities Co., China’s largest brokerage by revenue, surged 44 percent on its first day of trading in Shanghai Friday after completing the nation’s biggest domestic initial share sale since 2010. The brokerage had intended to use some of its IPO proceeds to finance its margin-trading business. Its sale brought the amount of stock sold by Chinese securities firms this year to a record $20 billion, data compiled by Bloomberg show.

Outside of new listings, brokerages have fared badly, with all but one declining since June 12. Western Securities Co. sank to its lowest level since April 9. Citic Securities tumbled almost 20 percent over the period.

Friday’s losses came after Morgan Stanley advised clients to refrain from purchasing mainland shares in a report that day, saying the Shanghai Composite’s June 12 high likely marked the top of the rally.

“This is probably not a dip to buy,” wrote Jonathan Garner, the head of Asia and emerging-market strategy at Morgan Stanley in Hong Kong. “In fact, we think the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and the ChiNext has now taken place.”

— With assistance by Allen Wan

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE