Troubling Signs of Potential Correction in Chinese Markets

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By Jacob Maslow

central financial district, beijing
Beijing, China Central Business District city skyline on the Tonghui River.

China’s Shanghai Composite Index turned a lot of heads when it briefly hit its highest point in five years. Compared to how it was in the previous year, this Chinese stock market is nothing short of impressive. It has racked up 63% gain from the year before.

With that said, there are a lot of signs that there is more than meets the eye, with regard to the overall health of Chinese stocks. One key factor market analysts look at is overall turnover. The turnover in the Shanghai stock market reveals a 47% decline since December. Moreover, people opening new stock brokerage accounts fell by half. Another troubling sign is that stock purchases that use margin or loaned money dropped by 38%. Finally, when you look at the actual stocks that are experiencing a lot of upward movement, the number of issues that reached a 52-week high actually dropped by a very worrisome 75%.
These indicators show that trading in China’s A shares might not be a sure bet. It was very easy to call the market due to the Chinese government’s monetary stimulus. A lot of new traders entered the market, and this pushed the Shanghai composite to eight monthly gains. This is no longer the case.
There are a lot of troubling signs that indicate that the momentum is slowing. In fact, it would not be surprising for the market to actually reverse itself. Regardless, a lot of international investors are quite bullish on the Shanghai Composite Index for 2015, due to drops in the value of certain stocks. It remains to be seen whether or not the Shanghai market can enter a more sustainable rate of appreciation.


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