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This week has brought more trouble for the Chinese stock market, marking the worst weekly performance for the Shanghai Composite Index in the past five years. Investor confidence was already fragile at the start of the week due to concerns over draft US legislation impacting WuXi AppTec.

“Now we’re all sitting ducks”

China’s stock market rout continued on Friday, pushing the Shanghai Composite index to a 5-year low.

Notably, investors struggled to identify any specific news triggers for the latest downturn but pointed to concerns about highly leveraged investors being forced to sell their holdings as one factor behind the abrupt market sell-off.

Despite a subsequent recovery in stock prices, which coincided with positive net investment inflows from overseas, the Shanghai Composite index concluded the week with a substantial 6.2% loss, marking its most significant weekly decline since 2018. Similarly, the CSI 300 index faced a challenging week, with a 4.6% drop, its largest since 2022.

At a certain point, the Shanghai index plunged to as low as 2,666.74. This led to a surge in social media discussions in China, with one commentator saying, “now we’re all sitting ducks.” Over the past year, the benchmark has declined by nearly 17% and 9.3% in the past three months.

What’s Causing the Persisting Declines?

The latest downswing in Chinese equities came amid an already poor week for the market, mainly due to the impact of draft US legislation that negatively affected WuXi AppTec Co. and brought geopolitical concerns to the forefront.

Furthermore, the recent liquidation order regarding China Evergrande Group was a stark reminder of how the property crisis is dragging down the world’s second-largest economy.

Despite Chinese authorities’ efforts to stabilize the situation by increasing monetary stimulus and committing to continued spending, especially in light of the property market downturn affecting government revenue, these promises and actions have done little to restore battered confidence.

Having experienced disappointments in recent years, investors now appear to have less faith than ever in the Chinese stock market.

At the same time, investors also fear a potential wave of margin calls, as the collateral value of shares continues to diminish. There is growing concern that failure to inject more funds into margin trading accounts could lead to forced liquidation of positions.

As of Thursday, the outstanding margin debt had fallen to 1.49 trillion yuan ($208 billion), marking the largest weekly decrease since April 2022.

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