China Market Meltdown May Spread

China’s equity market correction continued last week and is on the cusp of turning into a full-blown bear market, BlackRock Asset Management North Asia said today.

Russ Koesterich, BlackRock Chief Investment Strategist, said today that technology and small-cap companies led the selling on Friday, suggesting that the speculative froth in China is, at least temporarily, fading.

Chinese equities continued to sell off last week. Stocks fell more than 7 percent last Friday and are now off roughly 19 percent from their highs.

Tellingly, Friday’s selling was most acute in small cap and technology stocks, two segments that have dominated the bull market of the last year.

While we remain comfortable with China’s economic outlook, several factors suggest that it may be too early to aggressively buy this market.

First, China continues to be dominated by speculation. Even with the recent sell-off margin debt remains close to an all-time high.

Second, despite a near 20 percent correction, equity valuations are still very elevated relative to a year ago. For those looking for exposure, the H-Share market, traded in Hong Kong, is proving a less volatile way to access China’s equity market.

Chinese shares closed heavily down after a rollercoaster ride, despite a surprise interest rate cut at the weekend.

The benchmark Shanghai Composite Index dived by 3.34 percent, or 139.84 points, to 4,053.03 on turnover of 904.2 billion yuan. At one stage stocks were down by as much as 7.58 percent.

The Shenzhen Composite Index plummeted 6.06 percent, or 151.56 points, to 2,351.40 on turnover of 631.2 billion yuan.

Tokyo ended down 2.88 percent, or 596.20 points, at 20,109.95, Sydney shed 2.33 percent, or 123.4 points, to 5,422.5, and Seoul was 1.42 percent off, giving back 29.77 points to 2,060.49.

Hong Kong tumbled 3.63 percent at one point before sitting 2.55 percent lower in the afternoon.

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