The key Chinese Shanghai Composite Index recorded its biggest one day fall since 27 February 2007, as it plunged by 8.5% on Monday.
Despite the record fall on China’s main index, the Shanghai Composite remained up 6% from its recent low reached on 8 July, but it is still 28% lower than the high reached in June. Following the trend, the smaller Shenzhen Composite Index fell by 7%, while the small-cap ChiNext ended 7.4% down.
The rout on the markets came on the back of fears that the government might withdraw the support it has been giving the markets through the purchase of blue chip stocks. Other investors had the view that the authorities were testing the water in order to gauge the effect of the removal of measures which were taken to stabilize the markets.
Fu Xuejun, a strategist at Huarong Securities, said the authorities may want to “test whether the market has recovered its resilience”. He went on to say that the support provided by government funds is “apparently unsustainable.” As Xuejun explained, “The government wants to use state funds to stabilize the market, not prop it up back to 5,000 points overnight.”
Brokerages in China estimate that the state owned fund, China Securities Financial Corp., has spent hundreds of billions of yuan by providing support to the market, while no official figure has been disclosed.
A spokesman at the Chinese Securities Regulatory Commission, Zhang Xiaojun, denied that the agency-owned company that had been supporting the market by buying up shares, planned to exit the market. On the contrary, Zhang said that the company, Chinese Securities Finance Corp., will “increase its holdings [of stocks] at the appropriate time.” Zhang added, “I am positive that we will see state support emerging again in the next two days.”
According to the Wall Street Journal, Zhang also said that the regulator is not ruling out the possibility that big individual shareholders were coordinating “malicious” stock sales that contributed to Monday's sharp drop in prices.
The soft economic data coming out of China is adding additional downward pressure to the markets, according to Gerry Alfonso, director of trading at Shenwan Hongyuan Securities. Data release earlier showed a 0.3% fall in industrial profits year-on-year after rising during the past two months.
Modest declines on other Asian markets seemed more as a result of disappointing earnings results coming in from overseas.
With margin debt as a key factor that underpinned the strength of the rally on Chinese markets until mid-June, the move by Central Chinese Securities, a Hong Kong brokerage house, to raise 2.53 billion Honk Kong dollars ($326 million) in a share placement to expand its business, could be significant. Approximately 75% of the net proceeds are expected to be utilized in expanding the firm's margin financing and securities lending business which might assist in moves to stabilize the market on mainland China.