HONG KONG -- Shanghai and Shenzhen stocks tumbled Friday as an exodus of small investors in China led to further selling.
Slightly more than 2,000 stocks went limit-down, more than 70% of the roughly 2,860 listed on the two mainland China bourses.
The Shanghai Stock Exchange Composite Index plunged 7.4%, its steepest drop since Jan. 19. It stands at 4,192, down 18.8% from its seven-year high of 5,166 marked just two weeks earlier and sinking to its lowest since May 7. The ChiNext index gauging startup shares in Shenzhen plummeted 8.9% Friday, its biggest-ever decline and part of a 26.7% loss from its record high of 3,982 on June 3.
Discouraging factors are emerging in the Chinese market, turning investors bearish. The People's Bank of China pumped cash into the short-term financial market for the first time in about two months Thursday. This spurred speculation that there will be no large monetary easing move for the time being. The disappointment spread immediately, especially because the authorities did not intervene in the market earlier this week after Shanghai shares tumbled more than 13% last week.
Friday marked the debut of major brokerage Guotai Junan Securities, one of the biggest initial public offerings in the world so far this year. And securities authorities approved 28 additional IPOs this week, keeping investors concerned about the supply-demand balance.
Retail investors in China have leveraged margin trades, with their appetite heating up since the central bank began unleashing easing measures last autumn. Margin loans doubled over the last six months, surpassing 2 trillion yuan ($322 billion) at the end of May.
Margin trades must be settled within six months in China, and investors who took out loans are required to return the funds regardless of how the market is performing. The China Securities Regulatory Commission plans to allow settlement carryovers down the road, but this does not help investors who are facing repayment deadlines now and likely are unloading their holdings.
Other investors cannot afford further price drops and have no choice but to close their positions. "Worried about tighter rules, margin traders are increasingly withdrawing investment money," the Shanghai representative of Toyo Securities said.
Regulators moved to curb lending by brokerages to investors following rumors that an investor committed suicide after losses on margin trades involving train manufacturer CRRC. A subsequent report said margin trades were not the cause of the suicide, and the truth is yet to be known. However, this incident changed the mood in the market. Margin trades accounted for one-quarter of all trade value in China in mid-April but declined to the low 10% range at the end of last week.
Novice investors who jumped on the stock bubble bandwagon are apparently growing nervous and have started fleeing. Three out of 10 college students are stock investors, and 26% of them have invested at least 50,000 yuan, Mizuho Securities Asia says. Migrant workers increasingly have opened new accounts.
"Once the market begins a correction, it will have a dramatic impact on these investors, possibly leading to social instability," Shen Jianguang at Mizuho said.