Chinese equities suffered their worst weekly fall since the global financial crisis in 2008 amidst growing speculation of a bubble in the world’s second largest economy’s volatile markets.
The benchmark Shanghai Composite ended down 6.4% at 4,478.36 points falling more than 13.3% for the week. According to Market Watch, this is only the second time that the index has fallen into correction facility.
The much smaller Shenzhen Benchmark ended 5.9% lower at 2,742.58 points. The Guangdong based index also fell into correctional facility, off more than 10% from their highs this year, slipping 12.7% for the week.
“With Chinese authorities wanting the share market to be strong but not manic, the latest share market correction means that it wouldn’t be surprising to see another People’s Bank of China rate cut or required reserve ratio reduction soon,” Shane Oliver, Sydney-based global strategist at AMP Capital Investors Ltd., told Bloomberg.
“Volatility is to be expected as it has risen a bit too far, too fast.”
The selloff in equities this week, only interrupted by a feeble rebound on Wednesday, was due to panic triggered by a fresh move by the government to marginal financing and fueled by a recent wave in initial public offerings that drained liquidity.
Also weighing the stocks down were signs of improvement I the country’s real estate market, prices of homes in May rallied for the first time in 13 months, raising concern that the government would stop its economic stimulus program.
“Recently, elements that curb the market’s rise are emerging,” Bosera Asset Management Co told Reuters in an emailed comment on the correction.
“First… room for further monetary easing could be less than anticipated, and inflows of new investors could have peaked. Secondly, a highly-leveraged bull (market) is not sustainable.”
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