Experts: Speculation made slump worse

Short-sellers apparently saw opportunity to make money from declining stock values

High valuation of stocks and the use of high leverage instock trading caused the Chinese A-share market to slump, but short-selling by speculators made the situation worse, experts said.

"Poisonous assets－the stocks with extremely high valuation－and high leveraging are the main reasons for the Chinese A-share market crisis," said Gu Jie, a vice-president of Guotai Junan Securities.

The equities market suffered its worst three-week loss since 1992, with the benchmark Shanghai Composite Index closing at 3,686.91 on Friday. The dramatic fall wiped out $2.8 trillion in three weeks, more than 10 times the GDP of Greece in 2014.

But a few weeks ago, A-share market investors were jubilant and didn't see the big bubble being formed.

The Shanghai Composite Index closed at 5166.35 at its peak on June 12, up 59.7 percent from Dec 31. The ChiNext Index, the Nasdaq-style board that tracks growth enterprises, closed at 3899.71, up 165 percent in the same period.

According to Li Daxiao, chief economist at Yingda Securities Co, in May, a stock worth 1 yuan (16 US cents) had only 0.19 yuan of net value on the main board, and only 0.09 yuan on the ChiNext board.

It is estimated that the outstanding balance of margin trading through nonbrokerage channels can be as high as 2 trillion yuan－almost double the official margin trading balance financed through brokers and regulated by the China Securities Regulatory Commission, according to BOCOM International Holdings Co.

"Clearly, a rapid decline in margin trading, either from unmet margin calls and the resulting forced liquidation of margin accounts, or from unwinding margin accounts to take profits, led to the plunge," said Hong Hao, a managing director and chief strategist at BOCOM.

Hong said if this condition were to continue without government intervention, there would be wider systemic risks.

Publicly offered funds would face redemption pressure, and commercial banks would be left with bad debts because they loaned money to listed companies using stock as collateral, Hong said.

"It would ultimately influence the real economy of China," Hong said.

An industry expert who asked not to be named said, "Securities regulators' improper supervision may be an important reason forthe stock market crisis."

"When risk is accumulating, regulators should act decisively. But after risk has been accumulated, they should use a more moderate approach instead of forcibly pricking the bubble."

According to Caijing magazine, the regulatory commission made a survey on margin trading balances financed through brokers and regulated by the CSRC at the end of May, and the result was normal, but the commission did not fully know the scale of margin trading through nonbrokerage channels and umbrella trusts.

The commission announced on June 12 that it would clear margin trades through nonbrokerage channels and umbrella trusts, andthe stock market then declined in a chain reaction.

Speculators seized the opportunity to short-sell futures contracts. According to a branch of a securities company in Wenzhou, Zhejiang province, a client with 1 million yuan reached a daily trading value of 4 billion yuan in stockindex futures.

The China Financial Futures Exchange, the futures exchange where three stock index futures contracts are listed, suspended 19 accounts from short sales for a month, Reuters reported on Friday.

According to a statement by the exchange on Friday, the average daily trading volume of futures contracts of CSI 300, SSE 50 and CSI 500 indexes from June 15 to Thursday was 3.25 million contracts, up 24 percent over the levels seen during the first 15 days of June.

The position size of stock index futures fell to 237,000 contracts during the period, which indicates that short-term speculation is rampant, the exchange statement said.

"Although the CSRC has carried out a series of measures to buoy the market, asset disinfection and deleveraging can be the only solution," said Gu of Guotai Junan Securities. Asset disinfection means stock prices should fall to a reasonable or even undervalued level, Gu said.

The CSRC has made late-night announcements of supportive policies almost every day since last week.