What is driving Chinese market volatility?

Investors look at computer screens showing stock information at a brokerage house in Shanghai.
Aly Song | Reuters
Investors look at computer screens showing stock information at a brokerage house in Shanghai.

It's been a rock-and-roll ride for Chinese stocks over the last three weeks, with a year-long run-up culminating in dramatic slump. The Shanghai Composite is now down about 28 percent from its June 12 peak, firmly in bear market territory.

The downturn continued on Friday, with the index plunging as much as 7 percent to 3,664, after the China Securities Regulatory Commission said it had launched a probe into alleged market manipulation.

Investors fear the bubble in Chinese stocks has finally burst. Numerous monetary interventions by authorities in Beijing, including four interest rate cuts since November, have failed to quell the selloff, as investors fear the Chinese economy will continue to slow nonetheless.

"The sharp fall in Chinese equity markets is likely to feed further concerns about the state of the Chinese economy," said Barclays Research analysts in a note on Friday.

"If market perceptions increase that the Chinese authorities' control of the situation is slipping, this could have very adverse consequences for emerging market assets, particularly for those that are linked to Chinese demand, for example, via commodities."

The Shanghai Composite broke below the psychologically important 4,000 barrier on Thursday and 3,4000 is seen as the next target, followed by 3,000.

The question remains as to why exactly the Chinese market—which is dominated by domestic retail investors—is so capricious. With that in mind, what do you think is behind this volatility?

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Not a Scientific Survey. Results may not total 100% due to rounding.