The mainland Chinese stock market, which had gained more than 150% in a year’s time, prompting bubble warnings, seems to be deflating, as shares dipped 13.3% this week. The Shanghai composite index had its roughest week since the financial crisis back in 2008, putting it in official correction territory for the second time this year. A correction is defined as a decline of 10% or more from a recent high.
The China index, popular with newbie investors in China, many who are buying stocks with borrowed money to amp up returns, tumbled 306.99 points, or 6.4%, to 4478.36. “The most notable move in Asian markets today,” Barclays told clients in a research note, “has been the large correction in Chinese stocks.” The selloff follows a heady run for Chinese stocks. The Shanghai index soared nearly 158% from its intraday low of 2010.53 on June 20, 2014, to its intra-session high of 5178.19 last Friday.
“The incredible rally in mainland-traded stocks has led to many headlines about a stock market bubble in China,” Jeff Kleintop, chief global investment strategist at Charles Schwab, said in a client note. What caused the selloff this week? Growing fears that a market bubble may be deflating, experts say. “Concerns that equities are over-valued” is the way Barclays summed things up, adding that investors fear Chinese stock regulators might crack down on the use of borrowed money, or margin debt, to fund stock purchases.
Margin debt in China has soared to a record $363 billion, according to Bloomberg, and the median stock in mainland China is now trading at 95 times earnings, which even tops the price-to-earnings multiple of 68 back at the 2007 peak. xStill, the big selloff in China A-shares is unlikely to spill over to global markets, analysts at Bespoke Investment Group.