Chinese stock market, one of the world's best-performing bourses, plunged nearly 9 percent on Tuesday as profit-taking by local funds snowballed before a parliament session beginning next week.
The market's biggest drop in a decade did not appear to be triggered by concrete news, traders said. But institutions scrambled to lock in large gains made early this month, and some funds sold to raise money to pay dividends in March.
The tumble, which came a day after the main index jumped to an all-time high, bringing its gains for this year to 14 percent after a 130 percent rise last year, suggested investors had become extremely jittery with many shares so highly valued.
"This kind of terrifying fall means the market has become abnormal," said analyst Chen Huiqin at Huatai Securities, adding that shares could take a while to stabilise even if negative rumours proved false.
The benchmark Shanghai Composite Index, which rose 1.40 percent on Monday to close above 3,000 points for the first time, tumbled 8.84 percent on end Tuesday at 2,771.791 - its biggest daily percentage fall since February 1997.
Turnover in Shanghai A shares ballooned to an all-time high of 128.0 billion yuan ($16.5 billion), nearly a fifth higher than the previous daily record of 107.8 billion yuan set in January. A total of 835 stocks fell while only 33 rose. More than half of the shares dropped their 10 percent daily limits.
The market was hit by several negative rumours in late trade, including talk of an imminent interest rate hike after poor inflation data in the past two months. The central bank raised bank reserve requirements on Sunday. Investors were also unsettled by a rumour that Shang Fulin, chairman of the China Securities Regulatory Commission, might resign to take a political post. A senior CSRC official, contacted by Reuters, denied this. Many traders attributed the plunge mainly to hectic speculation. The approach of the National People's Congress session in Beijing had been a cue to bid up stocks on hopes that the congress would produce market-friendly policies, including corporate tax reform and steps to boost rural incomes.
"Institutional investors turned cautious - they sold stocks in which they were heavily invested," said Zhu Haibin, analyst at Everbright Securities. Technically, the index's plunge was negative because it formed a 14-day momentum divergence at this week's peak and broke a minor uptrend channel from early February. That leaves the next major technical support at the February low of 2,541, which could become a target for some investors.
However, traders said factors which had supported the bull run, including strong corporate earnings and good liquidity from newly established mutual funds, remained. CCB-Principal Asset Management said it had raised 10 billion yuan on Monday for the first securities fund to be launched this year. The market plunged 15 percent over two weeks starting in late January, but then recovered quickly to hit new record highs.
Among small caps that had previously been favoured by funds and were hit hard on Tuesday, consumer stock Kweichow Moutai tumbled 9.67 percent to 87.64 yuan. Industrial & Commercial Bank of China, the country's biggest bank, sank 8.04 percent to 4.69 yuan.Blue chip Baoshan Iron & Steel, which jumped 7.97 percent on Monday, fell its 10 percent daily limit to 9.03 yuan. Liuzhou Steel, a medium-sized steel maker which listed on Tuesday, soared to a high of 17.50 yuan before ending at 16.46 yuan, up 64 percent from its IPO price. That was in line with market forecasts of a debut in a 15-17 yuan range.
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