“The panic is spreading as more investors are forced to liquidate due to leveraged funding”, said Zhou Xu, an analyst at Nanjing Securities.
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Thursday’s decline came after a string of government policies to lift the market, including the securities regulator easing margin trading rules and the stock exchanges cutting stock trading fees by 30 percent. One minute shares are up 6%, the next they’re down 5% and plunging into a bear market.
Minutes later, it posted on its website new rules for margin trading and short-selling, allowing securities firms to negotiate with their clients to roll over contracts.
Yet following the declines of recent days, the China Daily reported warnings that stock market turmoil could generate a “systemic financial crisis” that could spill over into the country’s sluggish economy.
China’s securities regulator has pledged to crack down on market manipulation after rumours that foreign short-sellers were behind recent share price plunges.
The Shenzhen Composite Index, which tracks stocks on China’s second exchange, ended the morning session down 2.16 percent, or 50.79 points, at 2,300.61, having tumbled more than six percent earlier.
“These are extraordinary measures for extraordinary times”, Haitong’s Zhang said.
Despite the fact that Chinese authorities have been speaking of a “slower bull” market recently, most investors are sure – the bull is dead. Hong Kong’s Hang Send lost 0.4 percent to 26,189.62 while Japan’s Nikkei 225 was off 0.4 percent to 20,449.43.
Meanwhile, Bank of America Merrill Lynch said that recent rate cuts had not prevented shares from falling: “Short-term bounce aside, we doubt that the latest cuts will trigger any sustained rally”.
David Dai, Shanghai-based investment director at Nanhai Fund Management Co Ltd said short-selling in the index futures market was to be expected, because many institutions had no choice but to hedge risks using futures during the rapid market fall. China’s outstanding margin loans now total around 2 trillion yuan ($322.4 billion), more than five times the level from a year ago.
The editorial also said other banks which had similarly soured on Chinese equities were seeking to “go short on China on objective and disturb China’s economic reforms”. The poll was conducted during a week when Greece and its worldwide creditors took deliberations to the eleventh hour, yielding no deal and what will almost surely be a technical default on Tuesday, followed by a planned referendum in Greece on Sunday. Galaxy Entertainment Group (0027.HK) rose 13.3% while Sands China Ltd (1928.HK) was up 12.1%.
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Equity analysts say most Asian stock valuations are unlikely to be dramatically affected by a Fed rate hike as markets have already largely factored it in. On Friday, the currency hit a fresh low of 3.7860 against the dollar, and remains among Asia’s worst-performing currencies this year.
