Another day, another big stocks sell-off in China.
China’s benchmark Shanghai Composite shed as much as 4.5% during morning trading on Tuesday, while the Shenzhen Composite, which is heavy on tech stocks, dropped by as much as 5%.
While both indexes mounted a recovery before traders took a break for lunch, the Shanghai Composite is now solidly in correction territory. The index has fallen more than 15% over the past five trading sessions as investors grow increasingly wary of what many analysts fear is a bubble.
Experts remain puzzled by the stock market boom. China’s economy is going through a rough patch, with growth now at its weakest pace since 2009. Corporate profits are actually lower than a year ago.
In other words, exuberance for Chinese stocks isn’t backed up by fundamentals. Instead, it appears the market is being carried higher by various forms of government stimulus and investor frenzy.
In recent years, people in China — who tend to save significantly more than their Western counterparts — sunk their excess savings into the real estate market. Now that the housing market has cooled, investors are turning to the stock market.
Of particular concern is an explosion in margin buying — the practice of buying stocks with borrowed money.
According to Oxford Economics, 86% more margin accounts were opened in 2014 compared to the previous year. In December alone, 700,000 new accounts were created. The vast majority were opened by unsophisticated retail investors.
