Chinese stocks, represented by the Shangai Composite, fell another 3.5 percent today, taking their eight-day decline to 12.5 percent, after a whopping 130 percent run over the past year that had given rise to fears of a bubble.
In an interview with CNBC-TV18's Reema Tendulkar and Ekta Batra, Ben Cavender of China Market Research Group discussed what was driving the recent decline and whether this was the top of the past year's sterling run.
Below is the transcript of the interview on CNBC-TV18.
Reema: What is the key reason for the pressure that we are seeing in China today?
A: There are two things going on. The first is, following up from last week's rough week. We are still seeing investors leaving from the government cracking down on shadow banks lending to retail investors for margin lending, basically shadow bankers are giving money to retail investors, allowing them to pump up their stock portfolio.
However, that's not going to be happening now going forward, so that is causing lot of people to pull money out of the market.
The second thing is that there is no monetary easing over the long weekend; typically that's when the government decides to reduce interest rates, inject a bit of liquidity into the system. They didn't do that and so I think investors now are taking stock a bit.
Ekta: If in case this fund pullout is taking place in China. Where exactly is the reallocation taking place of those funds?
A: If you look at some of the institutional investors, some of that money could potentially be moving to India or elsewhere in Asia. I think unfortunately though if you look at what is happening in the stock market right now, most of the losses and most of money playing out of the market is Chinese retail investors, who don't necessarily have access to other international markets.
So at least for time being most of that money is going to be staying in China. They are sitting on the sidelines right now as investors look at what is going to happen over the next week or two.
Reema: Any chance of government intervention and perhaps providing any relief mechanisms?
A: It is hard to say, probably we will see more monetary easing over the rest of the year but maybe not in larger amount - that should help stock market. I do not think that rally is necessarily gone away but property market is trying to pickup in China right now.
Ekta: Is this more of hot money which is exiting the market according to you or is it long-term institutional investors who had holdings in Shanghai?
A: I think it's probably more hot money overall. It is coming out of the market right now. If you look at institutional investors, they are going to hit the pause button a bit and the way the Chinese stocks getting added to the MSCI index and when that happens I expect to see probably more money coming into the market from them. So on balance it's going to be positive over the rest of the year.
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