Having crossed the 3,000-point threshold for the very first time on February 26, the Shanghai Composite Index (SCI) experienced its biggest drop in a decade the following day. The 8.8% fall in the market saw 835 stocks fall and only 33 rise.
It was also identified as the source of a worldwide stock market slump, with the Dow Jones industrial average sliding 3.29%, its worst single-day fall since the aftermath of the September 11, 2001 terrorist attacks. While China did contribute to the downturn, a US government report showing a larger than expected drop in orders for US-made durable goods was also a key factor.
The SCI staged a brief rally on March 1 but it was soon back in negative territory, as were most markets in Asia. Even the market debut of Ping An Insurance, which rose 38% on the back of a US$5 billion domestic initial public offering, wasn’t enough to stop the rot.
Various things were blamed for the decline: high inflation prompting expectations of an interest rate hike; the formation of a government task force to combat illegal securities operations; further measures to crack down on lending for share purchasing purposes; a mutual fund sell-off; and talk of a capital gains tax (swiftly denied).
However, most analysts saw it as a necessary correction and warned of more volatility to come in the short-term – by March 19, the SCI had crept back up to 3,000 – while remaining bullish about the mid- to long-term.
One thing officials did admit was that the slump would not have been so abrupt if investors had been able to bet against the market through stock-index futures.
The release of revised futures regulations on March 18 moved China closer to this. The new rules are designed to encompass financial futures and options related to securities, interest rates and foreign exchange. Stock index futures are expected to debut mid-year.
The Shanghai Stock Exchange echoed the call for short-selling activities, as well as proposing other measures to boost market turnover. It wants to raise the daily trading limit of stocks from 10% to 20% and also allow day trading so investors can buy and sell the same stock within one trading day.