(Bloomberg) — Chinese stocks continued volatile trading on Monday following last week's selloff as investors weighed policymakers' latest promises to stabilize a struggling stock market.
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Small-cap stocks fell, with the CSI 1000 index down more than 8% during the day. 984 of the bill's participating members ended morning trading lower. The CSI300 index fell 2.1% before erasing its decline, but the Shanghai Composite Index halved the decline and fell 1.8%.
A prolonged real estate downturn, weak economic data and tensions with rattled investors in the U.S. have wiped about $7 trillion from the value of Chinese and Hong Kong stocks since their peak in early 2021. Margin calls and forced liquidations facing shareholders have emerged as key risks, with recent support announcements offering few details on how authorities will prevent collapse.
“Mid-cap and small-cap stocks are under strong selling pressure as some investors bet on greater varsity support for large-cap stocks,” said Ken Wong, Asian equity portfolio specialist at Eastspring Investments. ” “Trading long CSI 300 and short trading CSI 500 and CSI 1000 is one such popular trade.”
The CSI 1000 gauge, often used as the underlying benchmark for snowball derivatives, is facing selling pressure as the instrument reaches so-called knock-in levels that result in losses for investors.
Read more: China's snowball and its role in this year's stock selloff: Q&A
The persistent recession has also led to renewed concerns about a wave of margin calls as the value of stocks repossessed as collateral declines. The concern is that if investors fail to replenish their margin trading accounts, their positions could be liquidated.
The China Securities Regulatory Commission said on Sunday it would guide more medium- and long-term funds into the market and crack down on illegal activities such as malicious short selling and insider trading, pledging to prevent abnormal volatility.
Taken on its own, this statement may prove insufficient to persuade traders who have been repeatedly disappointed by the government's phased approach to stimulus. Investors are concerned about a negative loop in which technical selling pressure caused by margin calls and snowballing derivatives exacerbates market declines.
“It's really bloody.”
A recent spike in trading volumes for some exchange-traded funds (ETFs) suggests that Chinese state funds may have intervened to support the market. But history has shown that these purchases rarely have staying power.
Still, some see this sharp move as a sign of a market bottom.
“We are at the usual stage, and we are at the final stage of the decline, where things are going to get serious,” said Ma Xuzhen, a fund manager at Longquan Investment Management. “There's no point in getting worried at this stage. We all know we're near the bottom.”
Foreign funds briefly turned net buyers in morning trading, a pattern that was also seen on Friday. As of the midday break, stock withdrawals totaled 729 million yuan ($101 million).
Meanwhile, Liu Yuhui, an academic at a government-run think tank, reportedly said that the country should establish a stock stabilization fund as soon as possible to improve market confidence, with the goal of increasing its size to 10 trillion yuan. was quoted. ($1.4 trillion) or more.
In another sign of how angry some investors are, thousands have flooded the social media accounts of the U.S. embassy in Beijing to air their frustrations over the economy and stock market slump. Chinese internet users often struggle to find an outlet to air their grievances about the economy and government's performance, and official accounts of state institutions and media typically disable commenting functions or only display selected feedback. It's either you do it or you do it.
“It remains to be seen whether today is the bottom for Chinese stocks, but it feels like a bottom has been reached, indicating that policymakers don't want them to fall any further,” said strategist David Chao. That's for sure,” he said. At Invesco Asset Management.
–With assistance from Charlotte Yang, Abhishek Vishnoi, and April Ma.
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