Stocks plummeted last night in China with the Shanghai Composite losing 6.7% to 2,667.745 as investors headed for the exits following more talk about tighter credit lending standards. The sell-off marked the second-biggest monthly loss in 15 years.
The Index fell below the 125-day moving average for the first time since early February. According to Reuters, the drop below the key chart line, used by many Chinese investors to delineate a bull versus a bear market, encouraged more investors to flee stocks.
“Shorts and longs may still fight for control of that (125-day moving average) level in coming days, but the market will in any event remain sluggish in the first half of September as investors await August economic data,” said analyst Qian Xiangjing at CITIC-Kington Securities in Hangzhou to Reuters.
It’s very well known that China has been the leader for the global recovery, driven by aggressive policy moves directed from the Chinese government. And markets around the globe have followed the same bullish pattern as the Shanghai Composite, which, in turn, is leading many investors to question the viability of future equity gains in other indices.
In July, the Shanghai Composite had a short-term double top, thus resulting in a correction to the 2,761 level – a 21% decline from the Aug. 4 high, which retraced 38% of the rally from the October 2008 low. The greatest risk to consider now is if this is the start of a new bear market.
Reuters added: “A convincing breach of the key moving average, which analysts said still requires a few days to confirm, would put the index next support at 2,500, a more psychological level than technical one. That would suggest a market more driven by investor sentiment than by fundamentals.”
Today’s sell-off followed a 2.9% drop on Friday amid worries about a steep drop in bank lending in August. Investor sentiment is quickly deteriorating as many believe the flow of money into the Shanghai Composite will slow due to a drop in lending.
But analysts told Reuters that slowing lending should have no major impact on the economy, partly because Chinese companies are turning a large share of the short-term discounted bill financing they received in the first half of this year into long-term investment in the second half.
“We believe that the plunge since early August, after the 103 percent gain since late 2008, was likely triggered by excessive fears of aggressive policy tightening, while the fundamentals remain intact,” JPMorgan’s Hong Kong-based economist Qian Wang said in a research report late last week.
“The implications for the real economy are likely to be modest; we hold to our view that Chinese real GDP will expand a solid 8.4% on year in 2009.”
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