Chinese stocks suffer week-long slump ahead of Spring Festival

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The biggest weekly drop in two years on the Shanghai Composite Index, and a new six-month-low on Shenzhen startup stocks have seen Chinese investors spooked by a market slump in small caps stocks, which came after a strong start to 2018.

The Shanghai Composite Index finished up 0.44 percent as markets closed on Friday, 3.24 percent down compared to the start of the week, as the index wiped out all of the gains made in the past two weeks.

The Shenzhen Composite Index has fared even worse, hitting lows that haven’t been seen since September 2017. Since Monday, the index of startup companies has shed more than 5.39 percent of its value, erasing impressive gains that had been made since the start of the year.

The period before the Spring Festival national holiday, which begins on Feb. 15 this year, typically sees some investors cash in on stocks, but is there more to this latest slump?

Impressive GDP figures and other national economic data released earlier this month bolstered Chinese investors’ confidence, but the reality for many listed companies is telling a different story.

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Troubled LeShi announced on Tuesday that it made losses of 1.8 billion US dollars in 2017, and was facing a cash crunch, causing its stocks on the Shenzhen index to plummet to the daily limit of 10 percent.

Meanwhile, several other small caps companies have also published disappointing figures, apparently pushing investors to dump their stocks.

The entire Shenzhen index saw overall profits fall by 5.5 percent in 2017, with Reuters reporting that at least 40 firms suspended trading on Friday as margin calls beckoned, which would have forced them to sell off even more assets.

The Shenzhen Composite Index has now dropped 4.10 percent in value in the year to date, struggling in comparison to US rival Nasdaq, a similar index of tech startups, which is up 6.99 percent over the same period.

Strong gains in the stock market over the past 12 months, coupled with the looming national holiday for Chinese New Year are also likely factors behind this week’s stock market fire sale.

The month before Spring Festival in 2016 saw a slump of around 20 percent on the Shanghai Composite Index, while 2017 also saw more modest falls in the weeks leading up to the week-long holiday, when many factories close down production days or weeks in advance.