Asia Markets

Why Chinese stocks could slide 50 percent

A bubble in Chinese stocks is bursting and the market is likely to halve in value from current levels, one strategist told CNBC on Thursday.

The benchmark Shanghai stock index slid more than 3 percent on Thursday to 4,528, highlighting the frail state of a stock market that plunged 13 percent last week.

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Carlos Barria | Reuters

But even after the correction, the Chinese stock market is up some 40 percent this year alone, boosted by heavy investment by retail investors and monetary easing from China's central bank.

"We're cautious on Chinese equities, which we think is a bubble which is bursting real-time here," Stewart Richardson, chief investment officer at RMG Wealth Management, said on CNBC's "Worldwide Exchange."

Richardson said the Chinese market had "all the hallmarks" of a bubble—a rally driven by retail investors and valuations at more extreme levels than in the U.S. tech sector in 2000, just before prices fell sharply.

"We're beginning to see some price action—we're down 13 percent on the major indices last week. We've seen a bit of a bounce, then more selling coming in. Chinese stocks could pretty much halve from where they are today," he said.

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Richardson added that it was a "dangerous time" for Chinese stocks, with the economy slowing and corporate profitability poor.

China's economy grew 7 percent in the first three months of the year—its slowest pace since 2009.

"If China does what we think it could, which is to fall by 50 percent, then the Hong Kong markets will be hit very hard. We're avoiding those markets," Richardson said.

By's DharaRanasinghe.