The collapse of Chinese share prices is reversing one of the market’s biggest ever rallies and repeating a long history of spikes and retreats.
While policymakers are trying to stop the free-fall that started on June 15, momentum-oriented retail investors aren’t cooperating.
Their fear is proving just as hard to contain as their euphoria only a few weeks earlier.
The rout in Chinese shares since June 12 is the third and most significant drop in the recent rally.
In 2006-2007, three progressively larger pull-backs preceded a final surge.
The same leverage that fueled a massive stock rally in China is now one of the market’s biggest negatives as fleeting retail investors begin to unwind margin debt.
The repercussions of US$261 billion of Chinese margin debt are in conflict with government measures to stem the rout, which include curtailing IPOs, brokerage-funded stock purchases and other potential capital injections.
Margin debt is about 8 percent of the market’s free float.
Small-cap shares, which led China’s rally earlier this year, are bearing the brunt of retail selling.
The Shanghai 380 Index of small and mid-cap shares are down 46 percent from the June peak as of July 3, after surging 136 percent since Nov. 1.
The Shanghai 180 Index is down 29 percent.
Hundreds of trading halts and suspensions among small-mid cap shares mean this comparison is probably understated.
The views expressed in this article are those of Tim Craighead, an analyst at Bloomberg Intelligence.
– Contact us at [email protected]