Since experiencing a 52 week high on June 12, 2015 the Shanghai Composite index has been in an unparalleled free fall. The Shanghai stock market is mainland China’s most frequently exchanged market has lost 30% of its value. Meanwhile, the ChiNext Index has lost 42% of its value over the past 21 days.
The unprecedented high was believed to have been caused by a huge number of investors and trader who bought Chinese shares over the past year leading to a 150% increase. Such dramatic results have not been since since 1992 when a similar scenario led to the Chinese government implementing more stringent exchange regulations.
Over the course of the last week, The Bank of China has reduced short-term interest rates, while regulators have reduced margin requirements and put pressure on short term sellers. Government authorities and “private” Chinese brokerages are believed to be in the process of implementing even more dramatic measures to stop the downfall. For example, China has put a stop to new shares, causing dozens of companies to abandon their IPO dreams. The Chinese government fears that should the market continue to fall, investors will not only lose hope in the market, but also lose confidence in the government itself.
Meanwhile, China Vanke Co Ltd, the country’s most wealthy investor is in the works of repurchasing up to 10 billion yuan ($1.6 billion USD) worth of domestically traded shares in the hopes of protecting investor interests.
So what led to this perilous situation? Over the past year, Chinese stocks have more than doubled in value. This is in spite of what has been defined as a cooling economy and weaker than ever corporate earnings. In mid June when the market began to decline, the China Securities Regulatory Commission tried to pass off the events as a a “healthy correction,” in light of the unprecedented all time highs.
Attempts by the government and financial institutions to calm fears by reducing the interest rate at the end of June did little to achieve its goal. In addition to China Vanke Co Ltd who promises to put 10 billion yuan towards purchasing stocks, another 94 fund companies have also promised to do the same this week.
Many are asking why the Shanghai markets were allowed to reach such a state. It is believed that the underlying cause of the crash are the millions of everyday Chinese citizens who put borrowed money into shares, causing the shares to increase to unsustainable levels. Then, as prices began to decrease, investors felt inclined to sell in order to pay back borrowed money.
Analysts are keeping a close eye on the Chinese stock market going forward into this volatile time.