China's stocks tumble, as IPOs drain cash from market; Analysts warn of bubble

Chinese stocks head for the biggest weekly loss in six years as IPOs drain cash from the market this week and as investors are wary that the market is in a bubble.

The Shanghai Composite Index tumbled 3.7 percent at the close, with a weekly decline of 7.4 percent, led by technology and consumer companies.

Hong Kong’s Hang Seng China Enterprises Index lost 1.1 percent.

The Hang Seng Index slipped 0.2 percent.

The CSI 300 Index dropped 4.1 percent.

The ChiNext index of smaller companies sank 6.3 percent, paring its gain this year to 138 percent.

This week IPOs will attract about 6.7 trillion yuan ($1.1 trillion) of bids, as Bloomberg reported.

As China International Capital Corp. Guotai Junan estimates, subscriptions for 25 IPOs including Guotai Junan Securities Co. may lure the most funds since January 2014 when China resumed new share approvals.

The People’s Bank of China did not prolong at least some of the funds issued via its Medium-term Lending Facility. Some 670 billion yuan in three-month MLF loans mature this month, according to Bloomberg calculations based on central bank data.

It has been a no-brainer for Chinese investors in the recent times: buy shares of newly listed firms and watch your money grow. Thanks to regulations which kept offering prices low, a limit-up gain of 44 percent on opening day was completely guaranteed, and it did not stop there. According to Bloomberg, half of this year's IPOs through mid-May rose more than 300 percent in their first month.

Now, those can’t-lose speculation is looking fragile.

Bernard Aw, Singapore-based strategist at IG Asia Pte Ltd, thinks that it is the same old story from IPOs.

“This is the main reason why the Chinese market is so choppy today. The government is also restricting margin lending so we could see some more corrections in the Chinese market.”

In the meantime, economists caution that the stock market is in a bubble that will burst after the gauge more than doubled in the past year to reach its highest levels in seven years. They warn that stocks have risen too much and valuations have achieved critical levels.

David Woo, the head of global rates and currencies research at Bank of America Corp., said the bubble in China’s stocks rivals the dot-com boom of the late 1990s and its eventual collapse will have consequences for markets around the world.

Citing an analysis of global bubbles over 800 years, Bocom International Holdings Co. said earlier this week that a market crash may come within half a year.