Chinese stocks were annihilated today

China Photos/Getty Images

Chinese stocks, having endured a week of substantial losses, have been annihilated on Friday.

The benchmark Shanghai Composite index closed the session down 6.4% at 4,481.20 points. For the week the index lost 13.3%, the largest weekly percentage decline since June 2008. It was also the largest weekly points decline on record.

Here’s the chart of the index from the past year. Having hit a high of 5178 on June 12, the index has now lost 13.5%, marking a technical correction.

As you would expect with the performance of the broader index all sectors experienced heavy losses for the session. Telecommunications plummeted over nine percent while industrials and materials lost more than seven percent apiece. Utilities and financials outperformed, only losing five percent.

Reuters, in a report released after the market close, described the drop as “panic-selling, triggered by fresh government moves to tighten margin financing, and worsened by a tidal wave of initial public offerings that sapped liquidity”.

While selling of existing stocks to participate in these IPOs explain reduced market liquidity, given the sheer size of the decline seen this week, along with ballooning amounts of borrowed money to fund stock purchases, it is likely that margin calls contributed to the decline.

Not only was this week’s percentage fall the largest since 2008 – it was also the fourth-largest seen in the past two decades, as this chart shows.

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