Chinese Stocks Crash As Rare Sell Rating Shocks Traders

The question whether Beijing will tolerate another stock market bubble - one which it appeared to carefully cultivate until Friday - got an answer on Friday when Chinese stocks crashed, tumbling the most in five months. And it all started with a single sell rating. 

The Shanghai Composite Index tumbled 4.4% to close below the key 3,000 point level, ending an 8-week rally, with the Shenzhen Composite and Chinext all following.

The drop was catalyzed by a limit-down plunge in state-owned insurer People’s Insurance Company of China, which had become a poster child of the ramp-up in equities, and which saw its shares sink by the 10 percent daily limit, after state-owned brokerage Citic Securities advised clients to sell the shares, saying they are “significantly overvalued” and could decline more than 50% over the next year.

Until Friday's plunge, PICC had surged by the maximum allowed by the exchange for five straight days, however, the downgrade sparked speculation that the order to put a lid on market euphoria had come from the very top:

"Such a sell rating must have been authorized by the regulators," said Yang Wei, a fund manager at Longwin Investment Management Co. "The stock market is overheating, there is too much speculation. Regulators want to see a slow bull market, not a mad bull market."

Until Friday's plunge, Chinese stocks had been unstoppable, gaining the past eight weeks to beat every other national market in the world, sparking memories of China's 2015 stock bubble which ended in a massive crash and killed investor sentiment for the next three years. Investor confidence was revived in 2019 thanks to the government’s focus on economic growth, the new securities regulator’s less stringent take on financial risk and optimism over China’s relationship with the U.S. However, the $1.8 trillion rally since January has been so fast it triggered signs of overheating in all of the country’s major benchmarks.

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