China's equity bubble edged closer to bursting yesterday, as stocks plummeted despite the best efforts of the country’s central bank to steady the market.
The benchmark Shanghai Composite index closed 3.3 per cent lower to 4,053 and the Shenzhen Composite fell 6.1 per cent, amid mounting concerns that stocks are overvalued.
The Shanghai Composite was down 22 per cent from its 12 June high of 5,166, putting the index into a bear market, which is broadly defined as a 20 per cent drop from its peak.
Economists attributed the recent decline to regulatory changes to margin trading on 13 June, meaning investors can borrow less money from brokers to buy stocks.
The practice leads to more market volatility, as investors need to pay their brokers if share prices fall below a certain point. They will sell more stocks to come up with the cash, causing a bigger dip in the market.
On Saturday, the People’s Bank lowered interest rates by 25 basis points to 4.85 per cent and trimmed the cash reserves needed by banks in an attempt to calm stock market fluctuations, but this had a limited and short-term effect.
“The failure of Saturday’s policy moves to lift equity prices for more than a few minutes at the start of trading [yesterday] has focused attention on what else policymakers might do to support the markets,” said Mark Williams, chief Asia economist at research firm Capital Economics.
“The lesson from China’s last equity bubble [in 2007-2008] is that, once sentiment has soured, policy inventions aimed at shoring up prices have only a short-lived effect.”
China’s equity market is broadly seen to be heading towards a correction – or crash – as its stocks are highly overvalued, with some trading at 100 times their projected earnings.