SHANGHAI (Reuters) - Chinese stocks plunged nearly 9 percent on Tuesday, erasing about $140 billion of value in their biggest fall for a decade, amid fears that authorities would crack down on speculation that drove shares to record highs.
Traders said the slide did not appear to be triggered by concrete news. Institutions scrambled in hectic trade to lock in large gains made early this month, while some funds sold to raise money to pay dividends in March.
The tumble came a day after the main index jumped to an all-time high, bringing its gains for this year to 14 percent. The market soared 130 percent last year, making it the world’s best-performing major market.
“This kind of terrifying fall means the market has become abnormal,” said analyst Chen Huiqin at Huatai Securities, adding that shares could take a while to stabilize even if negative rumors about government policy proved false.
The benchmark Shanghai Composite Index .SSEC, which rose 1.40 percent on Monday to close above 3,000 points for the first time, tumbled 8.84 percent to end Tuesday at 2,771.791. It was its biggest daily percentage fall since February 1997.
Turnover in Shanghai A shares ballooned to an all-time high of 128.0 billion yuan ($16.5 billion), nearly a fifth higher than the previous daily record of 107.8 billion yuan set in January.
A total of 835 Shanghai stocks fell while only 33 rose, and more than half of the shares dropped their 10 percent daily limit. The plunge brought the combined capitalization of the Shanghai and Shenzhen markets down to $1.4 trillion.
The market was hit by several negative rumors in late trade, including talk that authorities would take strong steps to cool speculative activity.
The government announced on Sunday that it had set up a top-level task force to clamp down on illegal securities trading. Authorities had already signaled that another crackdown was coming, and it is not clear how harsh it will be.
There was talk of an imminent interest rate hike after poor inflation data in the past two months. The central bank raised bank reserve requirements on Sunday.
Investors were also unsettled by a rumor that Shang Fulin, chairman of the China Securities Regulatory Commission, might resign to take a political post. A senior CSRC official, contacted by Reuters, denied this.
Many traders attributed the plunge mainly to hectic speculation. Ahead of next week’s meeting of the National People’s Congress in Beijing, investors had bid up stocks on hopes that the congress would produce market-friendly policies, including corporate tax reform and steps to boost rural incomes.
Now that the session is just days away and much of the potential good news is already reflected in prices, institutions became keen to take profits, traders said.
“Institutional investors turned cautious. They sold stocks in which they were heavily invested,” said Zhu Haibin, analyst at Everbright Securities.
Technically, the index’s plunge was negative because it formed a 14-day momentum divergence at this week’s peak and broke a minor uptrend channel from early February. That leaves the next major technical support at the February low of 2,541, which could become a target for some investors.
However, traders said factors which had supported the bull run, including strong corporate earnings and good liquidity from newly established mutual funds, remained. CCB-Principal Asset Management raised 10 billion yuan on Monday for the first securities fund to be launched this year.
The market plunged 15 percent over two weeks starting in late January, but then recovered quickly to hit new record highs.
Among small caps that had previously been favored by funds and were hit hard on Tuesday, consumer stock Kweichow Moutai (600519.SS) tumbled 9.67 percent to 87.64 yuan.
Blue chip Baoshan Iron & Steel (600019.SS), which jumped 7.97 percent on Monday, fell its 10 percent daily limit to 9.03 yuan.
But there were signs that speculative interest in the market remained. Liuzhou Steel (601003.SS), a medium-sized steel maker which listed on Tuesday, soared to a high of 17.50 yuan before ending at 16.46 yuan, up 64 percent from its IPO price. That was near the top of market forecasts for a debut at 15-17 yuan.