Markets rebound: 'dead-cat bounce' or the real deal?

Has China's stock market 'bubble' burst?

26 June

Chinese stocks plummeted by more than 7 per cent in Friday trading, meaning it has now shed close to a fifth of its value in just two weeks. The fall has prompted questions about whether a 'bubble', which has seen shares surge to record levels this year, has burst.

The benchmark Shanghai Composite Index fell by 7.4 per cent overnight, the second worst day of the year, as CNN reports that hundreds of individual stocks dropped by the index limit of 10 per cent. According to the Wall Street Journal, the index has now lost 19 per cent since peaking on 12 June, one percentage point short of the drop required to classify as a 'bear' market.

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In a sign of how far the market has inflated this year, the Shanghai index remains up 30 per cent for the year despite the recent nosedive. Another key index weighted to technology stocks, the Shenzhen Composite, was down by 7.9 per cent overnight but remains 77 per cent up for the year, making it by far the world's best performing index.

There are myriad reasons for the sharp decline. Reuters cites liquidity concerns relating to investments made with borrowed money, amid a regulatory clampdown and the unwinding of the Chinese central bank's fiscal stimulus, after it withdrew billions from the banking system last week.

More puzzling is why the market was rising so much in the first place, at a time when once-rampant Chinese economic growth is slowing – and the question of whether the stock growth story really is over.

The Independent lists among the reasons for the recent surge the availability of borrowing to fund investments and a huge influx of amateur investors, with last week 1.4 million new entrants opening accounts. Intimating these trends are unsustainable it says we may yet see more increases in the short time, adding that "markets can stay irrational longer than investors can stay solvent."