A sense of panic gripped Chinese investors on Friday as stocks swung sharply in the final hours of trading before closing at a five-year low.
Traders were unable to identify any new news behind the moves, but cited concerns about forced selling by leveraged shareholders as one of the reasons for the sudden acceleration in gains. losses in local markets.
A subsequent rally, which coincided with net flows from foreign investors turning positive during the day, could not prevent the CSI 300 index from ending the week with a loss of 4.6%, the largest since 2022. The composite index of Shanghai It lost 6.2% in its worst week since 2018.
Sentiment was already fragile heading into this week, as investors digested the US bill that hit WuXi AppTec Co. and brought geopolitical concerns to the fore. This week’s liquidation order for China Evergrande Group offered a reminder of how the housing crisis is dragging down the world’s second-largest economy.
“As a person who is optimistic all year round, even I feel panicked and start to get pessimistic.”said Xu Dawei, a fund manager at Jintong Private Fund Management in Beijing. “Judging by the trading trajectory, the free fall we saw this afternoon indicates forced selling, and I fear this would trigger a downward spiral, causing further margin calls.”
The CSI 300 index plunged more than 3% at one point on Friday before closing down 1.2%. The indicator Shanghai Composite It also reduced its losses.
Chinese authorities have tried to put a floor to the crisis, increasing monetary stimulus and promising to maintain spending this year despite a housing market slump that weighs on key sources of government revenue.
However, these promises and measures have proven insufficient to rescue what has become a crisis of confidence. Burned repeatedly over the past few years, investors now appear to have little faith in the market’s prospects.
The persistent decline has raised fresh concerns about a wave of margin calls as the value of shares put up as collateral declines. The fear is that not replenishing your margin trading accounts could force positions to be liquidated.
The outstanding amount of marginal debt fell to 1.49 trillion yuan ($208 billion) as of Thursday. That puts it on track for the biggest weekly drop since April 2022, when the national benchmark index fell nearly 5% in a single day.
Concern that stock indices have fallen to levels that trigger losses for popular snowball derivatives has also made investors nervous in recent weeks.
“The market is battling a liquidity problem, with one pressure point after another from the snowball to the increasing number of margin calls and equity pledges,” said Daisy Li, fund manager at EFG Asset Management HK Ltd. .
Traders attributed Friday’s rapid reduction to a probable intervention of state funds.
“State funds bought shares when the index fell sharply to below 2,700 in afternoon trading”said Shen Meng, director of investment bank Chanson & Co., referring to a key level for the Shanghai Composite. “The fall forced state funds to intervene to stabilize the market.”
State funds have tried to calm sentiment before: Central Huijin Investment Ltd. revealed in October that it bought exchange-traded funds and vowed to continue adding to its holdings.
Foreign investors, who were previously withdrawing, became net buyers of mainland stocks by the close of the day, adding 2.36 billion yuan. They had been selling tirelessly into the new year, extending the streak of sales to a record sixth month in January.
“I don’t remember there being so much panic in the market since 2015; Although the liquidation is not as harsh as back then, the feeling is just as depressed and anguished.”said Li Xuetong, fund manager at Shenzhen Enjoy. Investment Management Co. “Anecdotally, I’m also hearing an increased number of margin calls. There shouldn’t be much room for decline here and usually the bounces at this stage are strong too.”
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