Why is the Chinese Stock Market So Volatile?

After rallying around 150% since the middle of 2014, mainland China’s ‘A Share’ market has corrected almost 35% since mid-June. Why is the stock market so volatile?

Neptune 16 July, 2015 | 4:17PM
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This article is part of the Morningstar's Guide to Emerging Market InvestingMorningstar's "Perspectives" series features investment insights from third-party contributors. Here, Douglas Turnbull, Head of Chinese Equities for Neptune, examines what has caused the recent market volatility.

There were two main triggers for this pullback. First, the Chinese market regulator the CSRC cracked down on the amount of leverage used to make stock purchases – known as margin finance – which had reached a dangerously high level. Secondly, issuance, both IPOs and equity placements, had increased substantially through the early summer, absorbing a great deal of market liquidity.

Once the selling started, a vicious cycle commenced whereby leveraged shareholders were forced to sell shares to meet margin calls as the value of their holdings fell, which in turn depressed market values further thus leading to more margin calls. Also, after the sharp rally, valuations were extremely high, as many commentators had been pointing out for months, and therefore provided no support.

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Neptune  is an independent and privately owned investment management company, founded in 2002 by Robin Geffen.