Okay, it looked pretty ugly on the Chinese stock market Friday.

The Shanghai Stock Exchange Composite Index plunged 7.4% to 4,192.87 points, it’s worst one-day loss since Jan 19.  This follows the 13% plunge last week. With a total 19% decline from its June 12 high, the benchmark for the Chinese mainland stock market is precariously close to the 20% mark used to denote a bear market. The Shenzhen Composite Index actually did enter bear territory with its 7.9% tumble.

Meanwhile, the CSI 300 Index, which tracks the 300 largest companies in China,  posted its biggest one-day loss in seven years, plummeting 7.9% to 4,336.19.

Almost 2,000 of the 2,800 stocks trading in Shanghai and Shenzhen fell 10%, hitting their daily limit.  Chinese stock-index futures also tumbled to their 10% limit

We know we sound Pollyannaish, but Asia Unhedged remains bullish on Chinese stocks.

Morgan Stanley, not so much.

There was no fundamental or economic reason for Friday’s dive. However, in a volatile market looking for direction, Morgan Stanley’s pre-market research note evaluating the A-Shares wasn’t going to be well received.

Don’t buy the dips, said analyst Jonathan Garner. He predicted a decline on the Shanghai Composite by as much as 30% by mid 2016. He said the June 12 index highs were the peak for the Shanghai and Shenzhen Composite Indices. The ChiNext Index has also topped out, said Garner. On Friday, it sank 8.9% for a 27% drop from its June 3 high.

Garner said he was concerned by four factors: a) increased equity supply, b) continued weak earnings growth in the context of economic deceleration, c) high valuations, and d) very high margin debt to free float market capitalization.

Yes, the market had gotten very heady. For the 12 months through June 12, the Shanghai Composite rocketed 152%, up 60% this year alone, to a seven-year high of 5166. And the Shenzhen had soared even higher.

Classic technical analysis will tell you that markets need to consolidate after such a rally. And some of the issues are real.

The slew of initial public offerings to hit the market has been huge and soaking up large amounts of the money. But that won’t be reflected in the indices.

And yes, the amount of margin in the market was approaching scary levels. Which is why the Chinese regulators started to clamp down on it two weeks ago, sparking last week’s dive. Obviously, a lot of this week’s decline is forced selling as investors need to respond to their margin calls.

But taking speculators out of the market, especially those buying on margin with small down payments, is typically good. Outstanding margin debt on the Shanghai Stock Exchange dropped for a fourth day on Thursday to 1.42 trillion yuan ($229 billion), reported Bloomberg.

“The correction is basically margin selling,” Francis Lun, the chief executive officer at Geo Securities in Hong Kong, told Bloomberg.

As we said earlier this week, we believe that the economy is rebounding and that liquidity will return next month. Typically when things we like have their prices slashed by 20% we go buying.

Join the Conversation


  1. Hello there, just became alert to your weblog thru Google, and found that it’s truly informative. I am going to be careful for brussels. I will be grateful if you happen to proceed this in future. A lot of folks will be benefited from your writing. Cheers!

  2. Wow that was odd. I just wrote an extremely long comment but after I clicked submit my comment didn’t show up. Grrrr… well I’m not writing all that over again. Anyways, just wanted to say excellent blog!

  3. Magnificent beat ! I would like to apprentice while you amend your website, how could i subscribe for a blog site? The account aided me a acceptable deal. I had been tiny bit acquainted of this your broadcast offered bright clear idea

  4. Hello there, You have done an excellent job. I will certainly digg it and personally suggest to my friends.
    I’m sure they will be benefited from this site.

  5. With havin so much written content do you ever run into any problems of plagorism or copyright violation? My website has a lot of unique content I’ve either created myself or outsourced but it seems a lot of it is popping it up all over the web without my authorization. Do you know any techniques to help stop content from being ripped off? I’d certainly appreciate it.

  6. I’m really enjoying the theme/design of your site. Do you ever run into
    any internet browser compatibility issues? A couple of
    my blog readers have complained about my website not working correctly in Explorer but looks great in Safari.
    Do you have any advice to help fix this problem?

  7. Hello! I just wanted to ask if you ever have any trouble with hackers? My last blog (wordpress) was hacked and I ended up losing months of hard work due to no backup. Do you have any solutions to stop hackers?

  8. It’s awesome to go to see this site and reading the views
    of all friends regarding this piece of writing, while I am also keen of
    getting familiarity.

  9. hello!,I really like your writing so much! proportion we communicate extra about your article on AOL?
    I require a specialist in this space to unravel my problem.
    May be that’s you! Looking forward to see you.

  10. Having read this I thought it was extremely enlightening.

    I appreciate you spending some time and effort to put
    this information together. I once again find myself spending
    a significant amount of time both reading and leaving
    comments. But so what, it was still worth it!

Leave a comment