Chinese investors watched in distress as stocks sank by more than seven percent in trading Friday, marking the biggest drop in five months and stoking fears of a peaked market, according to Bloomberg.
For weeks, investors have worried about a looming end to China’s longest ever bull run, a market characterized by strong investor confidence, a sustained uptick in stock prices, and the expectation that the rise will continue. The country's economic boom so far has lasted 935 days, Bloomberg reported Friday.
The benchmark Shanghai Composite index dropped by 7.4 percent to 4,192.87, a 19 percent descent from this year’s June 12 peak, according to the Wall Street Journal.
The dismal performance followed the Chinese markets' worst weekly performance since 2008 a week ago, according to the BBC. The Shanghai Composite fell by 6.4 percent, and overall took a 13 percent drop during the week.
“The concern is that a stock market collapse this year, as the rest of the Chinese economy is struggling to recover, might damage Chinese consumers’ confidence, their willingness to buy other things,” said Reuters Shanghai correspondent Pete Sweeney.
In addition to affecting trade with foreign companies, losing consumer confidence could lead to sweeping consequences for China’s retail-dominated economy, according to analysts.
Hans Goetti, Head of Investment in Asia at Banque Internationale A Luxembourg, told the Economic Times:
The Chinese market has rallied tremendously this year but we have to remember one thing. It is a market that is dominated by retail investors. In fact, 80 percent of investments in China are done by retail investors and, accordingly, margin debt has gone to the stratosphere. This has led to some worries by the securities regulators to reduce margin debt, hopefully, without crashing the market. Now that is a tall order.
Michala Marcussen, global head of economics at Société Générale, told Bloomberg that it was important to keep Friday’s events in perspective. “To my mind, what’s happening now is probably not a bad thing from a long-term perspective,” she said, citing the spike in China’s equity prices this year by almost 30 percent. “A bit of a healthy adjustment.”
Ultimately, the “tremendous transitions” in the Chinese economy will continue to be a fundamental of the market going forward, Ms. Marcussen said.
Reuters reports that the triggers for Friday’s tumble are far ranging, from “tighter cash supply” to “anxiety about policy direction.” Another concern: China’s initial public offerings (IPO) frenzy, which can perhaps best be evidenced by the jaw-dropping bids received by China National Nuclear Power Co., the country’s second-largest atomic power operator. The company, which had asked for $2 billion, raked in bids of $273 billion, according to Bloomberg. Reuters reports it eventually raised $2.1 billion -- the country's largest IPO since 2011.
“The IPO boom in the Chinese market is such that more than 50 IPOs listed or were approved by the CSRC (China Securities Regulatory Commission) over the past two weeks,” reported the Economic Times.
Going forward, “the big question for the Chinese authorities is whether they’re going to prop up the market,” said CNBC’s Sri Jegarajah. “There could be a 50-50 chance of some kind of intervention in the market, either directly or through policy support to shore up confidence.”