Fear or greed? China share plunge splits bulls and bears

Rather than a transformation in the world’s second-largest economy or rising corporate profits, the year-long surge in Chinese shares has been driven by liquidity unleashed by Beijing as it looks to bolster growth and accelerated by a wall of borrowed money.

Much of the funds from the government’s stimulus measures have found their way into equities, and with the property market stagnant the rising prices have drawn in millions of new investors, even housewives and retirees, who share tips from friends and on social media.

They often buy and sell on margin, putting up only a small proportion of the trade value and borrowing from a broker for the rest.

The practice offers bigger profits, but also magnifies losses.

It can also create a downward spiral when prices drop if lenders demand investors put in more money to cover their losses — a “margin call” — forcing them to sell.

Authorities have warned against irrational exuberance, with the ruling Communist Party’s mouthpiece the People’s Daily newspaper last month urging investors “not to forget risks in a bull market”.

Gains ‘too fast’

Analysts say the last fortnight’s falls were triggered by new restrictions on margin trading and accelerated by growing concern about overvaluations.

On June 12, the same day the market peaked, China’s market regulator banned illegal lending for share purchases and limited securities firms’ capacity to lend to clients.

Soaring share prices have also sent price-earnings ratios into the stratosphere — the median mainland share now trades on 85 times annual earnings, leading major foreign investment firms to warn of a bubble.

“Some stocks’ price may look overly high compared with their performance,” said Zhang Yanbing, an analyst with Zheshang Securities.

At the same time, China’s restrictive IPO system enhances volatility as it offers those lucky enough to secure flotation shares near-guaranteed first-day profits.

Investors pull funds from the markets to apply for new issues — there have been 25 in June — and pour it back in when unsuccessful.

But even after the latest falls, the Shanghai index has still more than doubled in a year, and there have been other potholes in its uphill path — in percentage terms, Friday’s drop was only the biggest for five months.

Shanghai Finance University associate professor Qin Huanmei blamed the plunge on “way too fast” previous gains, but added that she believed the government wanted the positive trend to continue.

“The leadership also wants a slow and sustainable bullish market, so this won’t be the end of it,” she told AFP on the sidelines of a financial forum in Shanghai ahead of the interest rate cut.

And ordinary investors do not want to give up on the prospect of profit.

“The overall market may run out of steam but some individual stocks may still have chance despite today’s fall,” Wan Qingyao, a university teacher in her 30s, told AFP.

“I will not clear out my stocks, not while I have lost money on them.”