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The major reason for the sharp pullback was due to a large Chinese brokerage (Guo Sheng Securities) cutting off margin financing for retail investors who want to trade in ChiNext stocks.
The ChiNext index, which comprises mainly small-cap companies who are typically seeing high growth and high valuations, has seen an incredible rally of over 160% on the year.
This could explain the move to restrict margin financing by the broker to limit risks in the event of a market collapse.
This is a worrying development for the Chinese equity bulls as margin financing may be curtailed in a big way if other brokerages follow suit. The rollover effect could damage the upward momentum seen in bigger markets such as the CSI 300.
Currently, we already see the ChiNext pullback filtering through to other Chinese markets and the Hong Kong shares.
The Shanghai Composite fell towards 4700, while the Shenzhen Composite dropped below the psychological 3000 level, racking up almost 5% of losses as of 1.30pm today. Likewise, the Hang Seng Index also tested below a key support level at 27221.
While the bigger picture still points to a bullish trend for Chinese equities, the prospects of a pronounced and prolonged correction has certainly increased with the latest development. For sure, it is too early to say if this will be the trigger for a much-mongered massive correction.
Close monitoring of what the other brokers will do in the near-term is paramount. We will also look ahead to next Monday’s MSCI review of the possible inclusion of A-shares in its Emerging Markets Index. Should the decision be favourable to China, we would see a fresh influx of institutional capital as index-tracking funds re-balance their portfolios to reflect the new weightage.
Singtel remains popular
The recent and sudden fall in Singtel shares continued to draw out bargain hunters and remained the most active STI counter, with 39.42 million units done as of 1.20pm. The stock extended gains above SGD4.00 to SGD4.14.
On the other hand, Noble is still stuck in its downward spiral, and briefly tested below SGD 0.70 in the morning. The Straits Times Index (STI) appeared to have stabilised around the 3350 mark. However, only a sustained break above the 200-day moving average of 3361.21 may ease the downward pressure seen on the Index.