China’s stock markets marked their first decline in eight days on Friday, ending a run more than a week long that saw some stocks reach multiyear highs and featured record-breaking initial public offerings.
Bullish encouragement from Chinese state media kicked off the mainland’s stock market rally. State media outlets then tempered their tone late this week in an attempt to rein in speculation, telling investors to think about the long term, days after predicting a “healthy” bull market.
China’s securities regulator also issued a note of caution on Wednesday when it warned investors of risks in margin financing, a practice in which brokers lend money to investors to buy stocks.
The regulator listed 258 margin lending groups that it said were illegal and told investors not to use such financing. Margin financing is rising at the fastest rate since 2015, according to Bloomberg data, and illegal margin lending is seen as a primary reason for China’s 2015 stock market crash.
Some analysts said the initial bullishness from state news outlets was to help boost consumer spending and China’s economic recovery from the coronavirus slowdown, the Financial Times reported.
But the frenzy of trading this week raised fears of a repeat of the stock market bubble that formed in late 2014 and burst in June 2015.
State media had also encouraged bullish investors in the run that preceded the 2015 crash, when the Shanghai and Shenzhen stock exchanges fell more than 40% in the following months. Altogether, the collapse wiped $5 trillion in market cap off China’s exchanges. Beijing ousted the head of the securities regulatory commission, on whose watch the crash occurred, in February 2016.
Stock markets in China are dominated by millions of individual investors. They account for 70% of stock transactions across China’s exchanges and are known for sometimes contributing to market volatility by trading on rumor and a get-rich-quick mentality. Since June 30, China’s stock market has added more than $1 trillion in value.
The Shanghai Composite rose 16.5% for eight days straight on Thursday. Even with Friday’s dip, it’s still up 17.8% since its June low. (The Nasdaq is up 8.4% for the same time period.) Friday’s trading was likely also dampened by the U.S. government’s decision to sanction Chinese officials over alleged human rights abuses against the Uighur ethnic minority group, a move that will ratchet up U.S.-China tensions. China has already said it would retaliate.
The week’s market frenzy led to some remarkable listings. One Chinese tech firm, QuantumCTek, surged 924% on its trading debut in Shanghai on Thursday, setting a record for the largest first-day jump of any Chinese IPO. The Star board, which QuantumCTek debuted on, has no trading limits on the first five days of a company’s IPO.
Hopeful economic recovery data coming out of China also buoyed investor confidence this week. China’s manufacturing purchasing managers’ index (PMI) rose for a fourth straight month in June, according to official data from China’s National Bureau of Statistics.
Manufacturing PMI, which represents factory activity, is taken as an important indicator of economic performance. The figure plunged 14.3 percentage points in February during nationwide coronavirus shutdowns.
