Chinese Stock Market's Dizzying Fall Likely Not the End of the Bull Market

TAIPEI, Taiwan (TheStreet) -- A sharp drop in Chinese stocks this month is guardedly being viewed as a market correction fueled by regulatory problems and a flood of IPOs, rather than the start of a long fall.

The Shanghai Composite Index fell 13% last week and then another 4.8% early Tuesday before recovering. Although some analysts fear a bubble has seeped into the giant Asian economy's "A" shares, some market experts suspect a particularly strong market correction accentuated by the Chinese market's volatility.

Chinese shares have shot up over the past year largely on sudden interest by local retail investors who have been deterred by government policy from speculating on property investments. Shares rose 47% in 2014 and hit a seven-year high about a month ago. Stocks also posted modest gains Tuesday and Wednesday due in part to bargain hunting.

"It's seen as a correction, not the end of the bull market," said Andrew Tsai, economist with KGI Securities in Taipei. "In the second half of the year, from July, we will see shares go back into consolidation and slowly rise again."

The fall since June 15 followed a sell-off in shares by local investors to repay margin loans. Government officials moved in April to stop some of that margin lending and may strike again, raising fears of a new sell-off as restrictions affect more mom-and-pop investors.

A glut of IPOs in China, with 23 expected this month alone, has also diverted capital away from the broad market, another factor in its decline, some analysts say. The market would presumably gain liquidity once the IPO euphoria fades, however.

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