Flat trading on China’s main market in early Wednesday trading was followed by a return to the extreme volatility that has dominated trading conditions over the last two weeks.
Some gains from the year-long bull market were erased as trading conditions became more bearish. A bear market is defined as a market that drops by more than 20% from the previous high.
The end of day close of trading saw the Shanghai Composite Index (SHCOMP, -2.47%) close 5.2% down after flat trading earlier in the session. The index is down by nearly 22% from its mid-June high, pushing it into bear territory. Despite this, values have still increased by almost double over the past year.
The trend was also evident on the smaller Shenzhen market (399106, -3.36%) which ended trading at 4.8% lower after being up by 2.4% in earlier trading on Wednesday. The ChiNext board als0 (399006, -1.51%) dropped by 3.5% after gaining up to 5.2% in earlier trading. Both markets have fallen in excess of 25% from the highs reached in mid-June.
Rumors that have been circulating over social media over the past few days to the effect that “foreign institutions” had engaged in “massive” short selling of mainland A-shares using index futures were denied in a statement by the China Financial Futures Exchange on its official micro blog account. The statement, which named Goldman Sachs Group Inc. and China Southern Asset Management, added that the latter did not even have an account with the exchange.
The official statement continued, “CFFX will continue to strengthen market monitoring, effectively protecting market order, and will severely punish and crack down on market manipulation.”
MarketWatch reported that Goldman Sachs declined to comment on the matter while China Southern could not be reached.
The high valuations of mainland listed shares make them an inviting target for short selling. This is when investors sell shares they don't own in the anticipation of buying them back later at a lower price with the difference as their profit. Foreigners are limited when trying to short exchange traded funds or derivatives listed outside China. Chinese regulators remain wary of the practice.
Several measures have been announced to calm the markets and to bring an end to the volatility. These include plans to allow the state pension fund to invest in stocks and a lowering of the stamp duty on share purchases.
Market sentiment is to a large degree driven by the belief that investors who have taken huge borrowings to fund their investments will be forced to sell in the coming weeks in order to repay the brokerages.
Analysts from Bank of America Merrill Lynch voiced the view that they don't think the deleveraging process in the stock market has run its course and that the market may stay volatile in the coming weeks.