Hundreds of companies have suspended trading in their shares.
However, it is important to keep China’s slowdown in perspective.
Small caps were most volatile in the session. Hong Kong’s financial centre was inevitably affected by the turmoil, but it has provided an opportunity to remind investors of the more open nature of its financial markets and stronger regulatory framework compared to the mainland. Concern that valuations are still too expensive has helped fuel a record stretch of foreign outflows through the Shanghai-Hong Kong exchange link over the past seven days.
Chinese farmers are deserting their favourite pastime, playing mahjong and gossiping, in favour of another game where everyone can win – China’s stock market.
The recent focus has been on what are called “A-shares”. Unlike in the US, Chinese companies tend to access capital through bank lending rather than through equity markets, though the Chinese government is trying to encourage greater equity market capitalization via reforms.
“After the lesson [learned from market turmoil], investors’ risk control will greatly improve in future”, Sun said. “What does this mean to their earnings and balance sheets?” he said. Originally, investors in China and overseas treated the selling as a much-needed release from a market that had soared 150 percent over the past year. Online retail sales rose 39.1 per cent and consumption now contributes more than investment to growth. Shenzhen stocks lost 40 percent in less than four weeks.
The market has also been distorted by an unprecedented level of government intervention after its recent slump spooked policymakers into unleashing a series of emergency support measures.
It can be a lot. It’s been a popular area, with more than $13 billion flowing in this year, and Chinese stocks can make up about a quarter of these types of funds.
The benchmark Shanghai Composite Index slumped 3.03 percent to close at 3,805.7 points. In response, Beijing has cut interest rates and stopped the trading of thousands of stocks, preventing some shareholders from selling their positions in hopes of ending the downturn.
The amounts are typically modest. While about US$3 trillion of that wealth evaporated in less than a month as stocks subsequently plunged 20 percent, demand from owner-occupiers is forecast to sustain sales and prices in the longer term.
The trend is heading that way.
The market meltdown has been mainly triggered by deleveraging of massive margin trading, which is unlikely to come back to its previous peak any time soon.
The company still plans on beginning to add A-shares later this year, through a special license obtained from the government.
Stock weakness doesn’t necessarily lead to economic weakness, and this is true across economies.
Other funds also own some A-shares through special licenses.
Among the actives, Tianze Information Industry surged by the 10 percent daily limit, while Inspur Electronic Information Industry advanced 5.81 percent, China Eastern Airlines spiked 9.95 percent and Hainan Airlines climbed 6.53 percent.