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(Bloomberg) — A sense of panic gripped Chinese investors on Friday as shares swung sharply in the final hours of trading before closing at a five-year low.
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Traders couldn’t pinpoint any fresh news behind the moves but cited concerns about forced sales by leveraged shareholders as among reasons for the sudden acceleration of losses in onshore markets.
A subsequent rebound, which coincided with net flows from overseas investors turning positive for the day, couldn’t stop the CSI 300 Index from ending the week with a 4.6% loss — its biggest since 2022. The Shanghai Composite Index lost 6.2% in its worst week since 2018.
Sentiment was already brittle heading into this week, as investors digested draft US legislation that’s hammered WuXi AppTec Co. and brought geopolitical concerns to the fore. This week’s liquidation order for China Evergrande Group offered a reminder of how the property crisis is dragging down the world’s second-largest economy.
“As a person who is bullish throughout the year, even I am feeling the panic and starting to turn gloomy,” said Xu Dawei, fund manager at Jintong Private Fund Management in Beijing. “Judging by the trading trajectory, the freefall we saw this afternoon indicates forced selling, and I fear that this would trigger a downward spiral, causing more margin calls.”
The CSI 300 Index plunged more than 3% at one point on Friday before closing down 1.2%. The Shanghai Composite gauge similarly pared its loss.
Chinese authorities have sought to put a floor under the rout, ramping up monetary stimulus and vowing to keep up spending this year despite a property market slump weighing on key government revenue sources.
Those pledges and measures, however, have proved insufficient to rescue what’s spiraled into a crisis of confidence. Burned repeatedly over the past few years, investors now have little faith in the market’s prospects.
The persistent slump has led to fresh concerns over a wave of margin calls as the value of shares put down as collateral shrinks. The fear is that failing to top up their margin trading accounts may force liquidation of positions.
The outstanding amount of margin debt slid to 1.49 trillion yuan ($208 billion) as of Thursday. That puts it on track for the biggest weekly decline since April 2022, when the onshore benchmark fell nearly 5% in a single day.
Concern that equity indexes have fallen to levels that trigger losses for popular snowball derivatives has also put investors on edge in recent weeks.
“The market is struggling with liquidity problem, with one pressure point after another from the snowball knock-ins to increasing number of margin calls and shares pledge,” said Daisy Li, fund manager at EFG Asset Management HK Ltd.
Quick Rebound
Traders attributed the quick paring Friday to likely intervention by state funds.
“State funds bought shares when the index fell sharply to be below 2,700 in the afternoon trading,” said Shen Meng, director at investment bank Chanson & Co., referring to a key level for the Shanghai Composite. “The plunge forced the state funds to intervene to stabilize the market.”
State funds have attempted to soothe sentiment before, with Central Huijin Investment Ltd. disclosing in October that it purchased exchange traded funds, and vowing to keep increasing its holdings.
Read more: China ETFs See Inflows Top 2015, Suggesting State Rescue
Foreign investors, who were retreating earlier, turned net buyers of mainland equities as of the day’s close to add 2.36 billion yuan. They had been relentlessly selling into the new year, extending the outflow streak to a record sixth month in January.
“I don’t recall there being this much panic in the market since 2015 — though the selloff isn’t as hard as it was back then, sentiment is just as depressed and in distress,” said Li Xuetong, fund manager at Shenzhen Enjoy Investment Management Co. “Anecdotally, I am also hearing increased number of margin calls. There shouldn’t be that much downward room here, and usually rebounds at this stage are also strong.”
–With assistance from Zhu Lin, Abhishek Vishnoi and Jing Jin.
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