China stocks slump most since 1996 as bubble warnings rise

Share prices in China plunged in one of the sharpest sell-offs in years, accelerating a downturn this last week in what has been, for much of this year, the world's best-performing stock market.

China's two major market indexes fell in tandem. The Shanghai composite fell 7.4 per cent. The Shenzhen composite fell even more, dropping 7.9 per cent. Share prices in Hong Kong, which is regulated separately, also fell, by 1.8 per cent.

Analysts had been warning for months about the risks of a stock market bubble in China, where giddy investors have driven up stock prices by purchasing shares on margin, or with money borrowed from brokers.

China's market has been an anomaly. Even though the broader Chinese economy has been relatively weak, share prices of many Chinese-listed companies have skyrocketed in the last year. Many traded at record valuations, often 80, 90 or 100 times their projected earnings.

The high valuations have been a boon for listed companies and their major shareholders. The market boom has also helped encourage a wave of Chinese companies that had listed in the United States to arrange stock buyouts and delist with the intention of eventually relisting in China, where stock valuations are much higher.

In the last few months, some well-known Chinese companies have announced plans to buy back shares and delist from the Nasdaq and the New York Stock Exchange, including Wuxi Pharma Tech, HomeInn Hotels and Qihoo 360, the Internet services provider, whose management offered $9 billion in a buyout.

But China's roaring stock market showed in the week just past how volatile prices can be: Shenzhen's main index fell the previous week, then rose early last week, then tumbled again.

Authorities are moving to tighten rules on buying stock with borrowed money, which is believed to be one of the key drivers of a stock market rally that has sent share prices to seven-year highs.

The regulators are also trying to crack down on financing from unregulated sources, what analysts refer to as over-the-counter stock margin financing.

"This is what triggered the correction," said Steven Sun, a Hong Kong-based analyst for HSBC. "Also, there have been controlling shareholders, significant shareholders and corporate management trying to cash out. They had been selling massively into the rally. And these are people in a better position to know the performance of their company."

Many analysts say that the government props up the stock market as a policy move aimed at helping debt-burdened state-owned companies repair their balance sheets. A strong market also improves the financing of private entrepreneurs, which could help spur innovation. But the government has been careful to warn about some of the risks, including the use of borrowed money, knowing that a sharp decline could hurt smaller investors.

Analysts at some major banks, including HSBC and Morgan Stanley, have been cautioning investors about the risks of the market, particularly after a big sell-off last month. Although stock prices are still up significantly from a year ago, with the Shanghai composite reaching 5,166.35, up as much as 160 per cent in the last two years, there are signs that some of the most sought-after stocks are now in the doldrums.

The Shanghai composite is down about 18 per cent from its June high. But in Shenzhen, the so-called ChiNext, a kind of Nasdaq-style board on the Shenzhen Stock Exchange for growth stocks, has dropped about 30 per cent in the last several weeks, meaning it is already technically in a bear market. The FTSE in London fell nearly 0.8 per cent on Friday; while the German DAX closed up 0.2 per cent and the CAC in France rose 0.4 percent. United States indexes were mixed: The Standard & Poor's 500-stock index was flat, while the Dow Jones industrial average rose 0.3 per cent and Nasdaq fell 0.6 per cent.

©2015 The New York Times News Service