Yes, Greece is the big drawcard for global markets, but China is the biggest concern because a few explosive days of selling could quite easily turn global sentiment on its head – and if it happened with Greece stumbling towards failure, then things could get rather hairy.
Last week’s volatility in Chinese markets increased as the days went on as investors fretted about an official crack down on margin trading – especially through a new form of investment vehicle called ‘umbrella trusts’ and talk (later strongly denied) that China’s market regulator had moved to slow trading on the highly speculative Shenzhen exchange.
As well there’s been a drain of cash because brokers have had to balance their accounts for the month – meaning they have cut the amount of credit they have been offering.
But these are all mostly technical factors – the biggest factor is the growing feeling the markets have risen too far to fast – that can be temporary and be resolved by more good news – such as corporate earnings or another interest rate cut, or it can take hold and drive markets lower as investors start taking profits or try to reduce their margin buying activity and reduce leverage. That can become self-fulfilling and trigger a huge and nasty sell-off.
So Chinese shares suffered their worst week in more than seven years, as both the Shanghai and Shenzhen markets fell into correction territory (a fall of 10% or more from their previous peaks).
The Shanghai Composite lost 6.4% on Friday to close at 4,478.36 and was down a massive 13.3% for the week, marking the second time this year it has fallen into correction territory. It dropped more than 10% from a recent high in late May, before rebounding to hit its highest level since January 2008 on June 5.
The smaller Shenzhen benchmark also fell into correction territory Friday losing 6.03%. The market is now down 12.7% from its record close of 3,140.66 on June 12.
Worries of high valuations and record levels of margin debt have sparked intermittent selling in the market in the past six weeks, but a record pace of new listings in Shanghai and Shenzhen has sucked a lot of money out of the market and the size of losses has surged in recent weeks.
The last time Shanghai fell this much was back in the GFC in 2008. On Friday nearly one thousand shares on both markets fell by the daily limit of 10%.
Combined turnover for the two bourses shrank to 1.29 trillion yuan ($US210.23 billion) from Thursday’s 1.5 trillion yuan.
The ChiNext Index, which tracks China’s Nasdaq-style board of growth companies, slid 5.41% on Friday in the sell off.
