Shanghai Composite Index heading for its biggest loss in eight years after falling nearly 8pc in one day

Chinese stocks tumbled, with the Shanghai Composite Index heading for its biggest loss in eight years, amid mounting concern that the nation’s longest-ever bull market has peaked.

Friday’s rout was paced by technology shares and smaller companies, the leaders of China’s world-beating rally through mid-June. About 66 stocks fell for each one that rose on the Shanghai Composite, which sank 7.9pc to a seven-week low of 4,170.18 at 2:29 p.m.

China’s $8.8 trillion stock market has plunged from first to worst on global performance rankings as leveraged speculators unwind their positions and a growing number of analysts warn that valuations have climbed too far. Morgan Stanley advised clients to refrain from purchasing mainland shares in a report on Friday, saying the Shanghai Composite’s June 12 high likely marked the top of the bull market.

“This is probably not a dip to buy,” wrote Jonathan Garner, the head of Asia and emerging-market strategy at Morgan Stanley in Hong Kong. “In fact, we think the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and the ChiNext has now taken place.”

The Shanghai Composite has surged 124pc over the past year through Thursday as margin debt climbed to a record and investors speculated monetary stimulus will revive the weakest economic expansion in more than two decades. The bull market, which turned 935 days old Friday, is the longest since Chinese bourses opened for trading in 1990 and more than five times the average lifespan of previous rallies.

“I’m a bit worried and may cut some positions if the market sees deeper declines,” said Lei Xianrong, an individual investor in Shanghai whose shareholdings are mostly in financial companies.

Futures on the CSI 500 Index of smaller companies dropped by the maximum limit of 10pc, while contracts on the CSI 300 Index fell 9.5pc.

With little in the way of economic data or corporate announcements to spark the plunge on Friday, some investors pointed to signs of a pullback by leveraged traders. Outstanding margin debt on the Shanghai Stock Exchange dropped for a fourth day on Thursday to 1.42 trillion yuan ($229bn).

“The correction is basically margin selling,” said Francis Lun, the chief executive officer at Geo Securities in Hong Kong.

The stocks favoured most by margin traders at the height of China’s boom in mid-June have since tumbled at least 24pc, helping send volatility in the Shanghai Composite to the highest levels since 2009. The benchmark index has had nine straight sessions of intraday swings exceeding 2pc.

Concern over a shortage of liquidity has helped fuel losses this week as investor funds got tied up in new share sales and the People’s Bank of China refrained from easing monetary policy, disappointing some analysts who had anticipated a cut in interest rates or banks’ reserve requirement ratios.

Morgan Stanley cited increased equity supply, weak earnings growth, high valuations and the surge in margin debt for its pessimistic stance, saying the Shanghai Composite may fall as much as 30pc through mid-2016.

Strategists at BlackRock, Credit Suisse and Bank of America all said last week that Chinese equities are in a bubble, while the median stock on mainland exchanges is valued at 85 times earnings — higher than when the market peaked in October 2007.

The CSI 300 Index of China’s largest companies slumped 8.6pc, led by a 10pc drop in technology shares. The small-cap ChiNext gauge tumbled 9pc, set to enter a bear market after falling 27pc from its June 3 peak. The Hang Seng China Enterprises Index of mainland companies in Hong Kong fell 3.2pc and the Hang Seng Index lost 2.1pc.


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