SHANGHAI (REUTERS) - China's major stock indexes finished the week on a grim note on Friday, with the Shanghai index ending the week down 13.3 per cent, its worst showing since the global financial crisis.
Many analysts had warned that Chinese bourses had become too frothy since their run-up in November, with some companies trading at 200 or 300 times earnings amid incredible volatility.
The doubling in primary indexes in Shanghai and Shenzhen since late last year has made Chinese markets the world's best performing major market, but net market capitalisation of the equity markets, at 66.2 trillion yuan (S$14.2 trillion), now exceeds the size of the country's gross domestic product.
The correction from the June 12 peak has wiped out 9.24 trillion yuan worth of value. "Today's fall was more savage than we had expected. Investors were panicking," said Zhang Chen, analyst at Shanghai-based hedge fund manager Hongyi Investment.
"The market had gained so much previously, so I think there's an inherent need for a correction."
On Friday, the CSI300 index of the largest listed companies in Shanghai and Shenzhen plunged 6.0 per cent, to 4,637.05, while the Shanghai Composite Index lost 6.4 per cent, to 4,478.36 points.
All the major indexes are down 10 per cent from their peaks, but analysts say it is unclear if this is the beginning of a longer correction. In the past, dramatic drops have only lasted a few days before bargain shoppers swept back in, driving stocks to new highs.
The previous corrections were generally short-term reactions to crackdowns on the exuberant usage of margin financing to fund investments.
This time, analysts point to liquidity related factors, including a flood of IPOs sopping up cash in the market, the upcoming end of the first half reporting period for Chinese companies, and recent moves by the central bank to tweak its monetary management to absorb short-term money in the market and transfer it to longer-term investments.
"Recently, elements that curbed the market's rise are emerging," Bosera Asset Management Co said in an emailed comment on the correction. "First...room for further monetary easing could be less than anticipated, and inflows of new investors could have peaked. Secondly, a highly-leveraged bull (market) is not sustainable."
Short-term money rates have indeed risen sharply this week, but they remain well within what traders consider accommodative territory, with the benchmark seven-day bond repurchase agreement - considered most indicative of general liquidity conditions - trading at 2.72 per cent.
As the current rally was set off by a surprise interest rate cut in November, which caused investors to charge into equities after years of scorning stocks, some fear that the end of the easing cycle will provoke a destructive market crash, as in 2009 after a similar rally was fuelled by easing monetary policy.