Many Chinese companies have halted trading in shares as the nation continues to grapple with one of the steepest declines in over two decades. The halt in trading has left 43 percent of the entire stock market frozen.
Around 203 mainland companies announced the suspension of trading in shares. The sell-off was triggered by a move to tighten margin trading and short-selling rules. The tighter margin trading rules made it difficult for investors to borrow money to play the market.
Ruchir Sharma, head of emerging markets and global macro, Morgan Stanley Investment Management, says the entire move up that the Chinese market witnessed over the past 12 months had absolutely no fundamental basis. "We've lived through many bubbles in the past and this bubble in China meets all the checklists of a classic mania and a bubble," he says.
According to Sharma, it is the most extreme bubble the market has seen in the last 20-30 years since there was no fundamental basis for this massive rally, given the weak state of the Chinese economy and the amount of margin debt which it accumulated in such a short span of time.
The amount of margin debt today in the Chinese stock market is higher than any market in history, he adds.
In an article in The Wall Street Journal, Sharma says China's massive run-up in debt has increased by over USD 20 trillion to around 300 percent of GDP since the global financial crisis in 2008.
Up until now, there was a notion in the market that the Chinese government can achieve whatever it wants and is in complete control of the situation, but that premise is being questioned now, says Sharma. He adds that the so-called Chinese Put is being questioned.
"There was a belief that yes, China has a big debt problem but China will be able to manage this because the government is in perfect control of the situation, so the fact that that basic belief is being questioned about China is what's causing this mini-panic across all China plays on the world," he told CNBC.
Gross domestic product (GDP) grew at its slowest pace in six years in the first quarter of 2015, growing at an annual 7 percent in the January-March period, slowing from 7.3 percent in Q4 of 2014, China's statistics bureau said.
According to Sharma, if the Chinese economy can continue to grow at even 5-7 percent over the next couple of years, there will always be some opportunities considering it's a large enough market. But with the massive debt accumulation, questions are being raised on whether the economy can even grow anywhere closer to this pace.
Moreover, he says valuations too are a concern. Despite the 30 percent odd market fall in the past one month, valuations continue to remain high. Resting his case, Sharma says "Outside a few large cap stocks in China, the entire market is trading at extremely high valuations and those valuations need to correct a lot more before they really become a buying opportunity."
(Written for the web by Devika Ghosh)
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