Chinese stocks have just seen a spectacular collapse

China Photos/Getty Images

For the second session in a row, and second Friday in a row, Chinese stocks have been hammered.

The benchmark Shanghai Composite index finished the session down 7.38%, the largest percentage drop since January 19 this year and largest daily points decline since Jan 28, 2008.

Having hit a multi-year high of 5178 on June 12, the index has now lost over 19%. At the low point of today’s session, 4139, the index briefly registered a decline of more than 20% from this years high, marking a technical recession.

For the week the index lost 6.4%. Had it not been for the 13.3% decline of the previous corresponding week, it would have been the largest fall in percentage terms since July 2010.

All sectors are trading in the red with healthcare, technology, industrials and consumer cyclicals all off by more than 8.0%. Telecommunications, having briefly fallen 10%, its daily down limit, finished the session off 9.9%.

Elsewhere the ChiNext index in Shenzhen, China’s equivalent to the tech-heavy Nasdaq index in the US, collapsed, dropping 8.91%. Having rallied 222% from late July 2014 through to June 5 2015, the index has lost over 28% in just 14 trading sessions.

The daily chart of the 12 months tells the story.

According to a report from Reuters, the declines come “as markets struggle to digest a flood of IPOs, tighter cash supply and general anxiety about policy direction”.

Whether that is indeed the case is somewhat questionable. Chinese stocks have been on an unbelievable tear since midway through last year with all major indices recording gains in excess of 100%, despite a deteriorating fundamental backdrop.

Are the chickens coming home to roost? It certainly appears so.

Monday’s open, particularly in the absence of positive news to bolster stocks this weekend, could be equally as ugly.

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