Why the stock market dived so fast in such a short period

An investor checks stock index at a brokerage house in Huaibei, Anhui province, July 7, 2015. [Photo / IC]

The benchmark Shanghai Composite Index fell from 5,178 to 3,727.13 in 16 trading days from June 15 to July 7. In our opinion, this "out-of-control" and "free-fall" situation unraveled due to several reasons. No doubt, the stock market over the past 12 months has been Shanghai Stock Exchange Composite (SSEC). From June 30, 2014, to June 30, 2015, the SSEC was up a staggering 109 percent. It is natural that the market will fall more than 20 percent, after such a bull run.

However, it is not natural that this fall happens in such a short period. Next, large scale of leverage money invests in stock market. According to Wind database, until May 31, 2015, there were 3,587,780 credit accounts, 176,750 additional accounts compared to last month. On June 15, the financing balance was 223,193.1 billion yuan. Moreover, the margin balance was 878.5 billion yuan. These figures do not count the off-field leverage through non-brokerage channels, which is estimated to be about 3.3 trillion yuan. Therefore, when the China Securities Regulatory Commission announced its intention to investigate the off-field leverage, the market index plunged. Finally, most of stocks were down for several days, amplifying the panic.

Moreover, this sort of feelings may push them to sell their stocks unreasonably. We think this is the main reason. People have stopped talking about the bull market, but how our government would do to save this disaster, and how deep our stock market might go?

In our opinion, this is not a stock disaster, but a quick adjustment for the bull market. However, we do not say that the bull market is still there. This opinion becomes louder if we take into account our government current movements about China's stock market. First, since this is the first time that people can sell borrowed stocks, it means that the speed of market adjustment will be quicker than ever, and it will change the impression of China's stock market of being a long-time bear and short-time bull market in the long run. Second, in May 2015, we have 213,155,982 stock accounts in total, of which 54,675,700 were active.

Moreover, we have 4,139,001 accounts which have at least 500,000 yuan in each account, which is also the threshold for margin trading eligibility. Therefore, we have 3,587,780 credit accounts, out of 4,139,001 qualified accounts for margin trading, which equals to 86.68 percent of qualified accounts already dealing with leverage. That is to say, there not too much additional leverage can be used in the future. Third, up to May 2015, there were 68,210,000 accounts that hold stocks, however, only 61,340,000 accounts trading this year. Therefore, there are still lots of accounts waiting for the right time to sell their stocks, even ignoring the new accounts in this year.

In that sense, the selling pressure is strong. In addition, there are a lot of accounts suffering loss, but they are not selling their shares. It is also a strong selling pressure. Therefore, the current stock market is definitely not a disaster, but the bull market has gone.

Zhang Shuyu is an assistant professor of University of International Business and Economics, School of Banking and Finance, and Yan Xiaolong is an investment manager of China Life Investment Holding Co Ltd. The views do not necessarily reflect those of China Daily.