China’s stock market fell 0.7 per cent Friday on fears the country’s raging bull market could be headed for a government-induced correction.

After a week in which the benchmark Shanghai Composite Index broke through 4,000 points and daily trading volumes eclipsed the rest of Asia, including Japan, investors are worried the government is preparing to issue a new policy to dampen irrational exuberance.

”The likelihood of some sort of action as we move up from 4,000 towards 5,000 increases significantly,” according to Stephen Green, senior economist at Standard Chartered Bank. ”Move slowly now and the risks of a much bigger, more painful correction later in the year increase.”

The Chinese government usually issues such policies, including interest rate or reserve rate requirement rises, on Friday evening after the market has closed so as to give investors time to digest the news over the weekend.

The Shanghai Composite closed the morning session below the 4,000 point mark, at 3,993.85, but rallied in the afternoon to finish the day at 4, 021.68.

Attempts by senior officials, including central bank governor Zhou Xiaochuan, to talk down the market have failed as retail investors pour in with the establishment of nearly 400,000 stock accounts a day.

The market has jumped about 300 per cent in less than two years following a four-year bear market that wiped out more than half the market capitalisation on the Shanghai and Shenzhen exchanges.

Price to earnings ratios in China are now reaching 50 times, compared with the Asian average of 14-18 times, and the market is being categorised as a bubble by virtually all observers.

Possible actions the government could take to calm investor frenzy include a large interest rate rise, increasing the flow of new share sales by encouraging large cap companies to accelerate listing plans and introducing a capital gains tax on stock sales.

Get alerts on Equities when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article