Did Beijing overreact?

THE sharp sell-off in the Chinese stock markets in the last couple of weeks caused a lot of anxiety and uncertainties in the minds of global investors. The panic selling by domestic investors and a wave of margin calls helped push Shanghai domestic A shares down by 30 per cent or so in the last four weeks to July 9, although the index has been in positive territory since the beginning of the year and has recorded a 150 per cent gain since the bull market started.

Chinese domestic investors have cut their borrowings by a third and the margin debt outstanding is at its lowest level in four months, down by 810 billion yuan (S$178 billion) from its June 18 peak of 2.27 trillion yuan.

Worries also centre on umbrella trusts, in which banks sell wealth management products to retail customers and promise a fixed return. Although the banks offer no formal guarantee on stock market-linked management products, there are concerns about whether lenders would face pressure to ensure payouts to protect their reputations. We need to be watchful of this, but so far, there is little sign that these derivative products face default issues.