|Michael A. Katz |||Dec 09, 2014 09:43 AM EST|
(Photo : Reuters) Just days after breaking through the 3,000-point barrier for the first time since 2011, the Shanghai stock market plunged in its biggest one-day percentage decline in five years.
What a difference a weekend can make. Just days after breaking through the 3,000-point barrier for the first time since 2011, the Shanghai stock market plunged in its biggest one-day percentage decline in five years on Tuesday.
Shares tumbled 5.43 percent for the day, moving the benchmark Shanghai Composite Index (SCI) back down below the psychologically significant 3,000-point mark. The decline was blamed on a sell-off in the financial and property sector stocks.
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Prior to Tuesday's nosedive, the Index had seen five consecutive days of strong rallies. And over the last 11 trading days, two key stock indexes - the Shanghai and Shenzhen exchanges - climbed some 20 percent, with the biggest one-day turnover hitting 1 trillion yuan ($162 billion).
The correction comes the day after China state news agency Xinhua cautioned investors not to get caught up in the stock rally frenzy.
"It's not that one of the world's worst-performing markets does not deserve a rally or two," said Xinhua, pointing out that China's central bank recently issued a benchmark rate cut and injected a considerable amount of liquidity. "But all these factors appeared insufficient to put the stocks on fire ... even a 'bull market' does not adequately describe the frenzy at the Shanghai and Shenzhen exchanges."
Xinhua warned that the Chinese economy is still "painfully adjusting to the so-called New Normal where growth will slow further."
The new agency added "or individual investors ... greed now appears to triumph fear, with extraordinary, if not maniacal, numbers of new account openings and purchases that had not been seen for years.
"Also unseen was the enormous role of leverage in this rally, as introduction of margin financing enabled investors to buy shares with borrowed money."
Outstanding margin position is now around 850 billion yuan, according to Xinhua, more than twice the amount reported at the end of June.
"The problem with a momentum market, however, is that one can't tell when the tide will turn," said Xinhua. "Therefore, it is necessary to ring some bells now as the red-hot market is rocketing a bit too fast."
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