Following a heady 50 percent run year-to-date, the Chinese share market today dropped precipitously, trading about 6.5 percent lower at the time of this writing.
Media reports said leading brokerages have tightened margin funding rules in order to curb in order to what many analysts believe is heightened speculative activity in the market.
“There are two things that are happening today,” Shaun Rein of China Market Research told CNBC-TV18. “The margin investors are going out. But more importantly, there has been no fundamental reason why the market has gone up while the Chinese economy is slowing down.”
“The market is going up because people think they will go up,” Rein said, while adding that he did not expect a straight decline ahead and shares would move with fits and starts.
Rein pointed out that make-up of the Chinese equity market was different from, say, the US.
“In the US, most shares are held by institutions, who are largely buy-and-hold investors,” he said. “In China, they are largely held by individuals who like to flip.”
Reema: In a recent interview, you had pointed out how the Chinese markets could go through the start and stops and there could be some amount of volatility given the kind of gains it has already put in and you told us just about a few days back. But what is the mood today, what is happening, it has cracked more than six and half percent and it is falling like nine pins?
A: As I said earlier, there are sort of two things that are happening. One is that a lot of Chinese investors are getting back in on the margin but as you rightly pointed out the new margin rules are sort of cutting things back. So there is going to be less liquidity tin the market place but the main thing is consumer psychology.
If you look at the rise in the last six months it really has not been due to any fundamentals. If you look industrial profits are getting squeezed down, economic growth is slow. So there has been no real profit or fundamental reason why the Asia market is going up. It is that people have been investing in because they think the market is going to go up.
So what happens is there are all these individual retail investors who are considering adding money in and adding more money in most of these investors got burned a decade ago and as soon as the market started dropping they came out very quickly and that is why you see a seven percent drop today. You are going to see ups and downs that are very volatile, very dramatic in Asia market. Investing here is not for the faint of heart.
Sumaira: That is true actually because in the last 12 months, the market has seen a surge of about a 140 odd percent and a lot of this was fuelled by margin financing. Some of the data that I have says that outstanding value has actually hit a record 2 trillion yuan on Tuesday itself. So, can you give us a sense of, with these new rules being put in by the brokerages, how much lower do you think the market could head from here?
A: I still think it is going to hit where we were before when I spoke to you earlier this week. You are going to see a dramatic drop, 7-8 percent. We have actually been interviewing investors today and a lot of them are saying that they might jump back in tomorrow or maybe come back in next week. They just want to wait and see if you are going to see a drubbing in the markets tow-three days in a row.
So, you have to think, in the United States most shares are held by institutional investors --mutual funds, hedge funds. They tend to buy and hold longer and China, most of the shares are actually are run as a larger percentage by individual investors. You have to think of the Chinese Asia market as like millions of little individual private hedge funds that are going in and out trading on a very regular basis and that is why you see such fast drops and also such gains. I actually think that you are still going to see a 5-10 percent growth in Asia by the end of the year but it is definitely not going to be stable, it is going to be up and down.
Reema: So if the inflows in China are driven by all domestic individuals will increase in margin requirements deter them from putting in money. Can we now expect lower inflows into the Chinese equity market which will reign in the rapid rise in the equity markets performance?
A: Yes, definitely. The margin requirement shifts are definitely going to cause a lack or lowering of liquidity in for the market for sure and that is going to stop some of the fast growth but again a lot of the selling has been from individual investors today. They have earned money because of the gains of the last six months. So they are just putting their money into cash right now and they are going to be waiting and maybe buy on the dips. I don’t think this is going to be a straight downward trajectory over the next month again. You are going to see ups, fits and starts in the next couple of weeks.
Reema: So, this rapid rise in the equity prices in China, do you think markets can continue rising at that fast pace so now we will expect markets to do well but perhaps not at the same pace that its already grown at?
A: I don’t think it is going to grow at the same pace. There has been a lot of fears of a bubble and so the government wants to make sure that people get really hurt very quickly, so they want to slow things down. That is why you are seeing the state media is constantly saying that the rise in Chinese A-Shares has been really fast, investors need to be very cautious and again many of the investors today got burnt 10 years ago and so they are being very cautious.
That is why the drop is so fast because a lot of people 10 years ago would lose 2 percent a day and they would stay in the market and then before long they have lost half of their portfolio value. So, this time they wanted to take their profits off the table and sell quickly and that is why the drop is just so fast today.
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