New York (HedgeCoVest.Com) – In Tuesday’s trade, the Shanghai Composite Index fell 6.5% for the worst daily loss since January in percentage terms and the worst daily point loss since 2008. The selloff came with a record breaking volume day with 1.2 trillion yuan worth of shares changing hands.

The selloff was spurred by brokerage firms tightening margin trading requirements for clients and the central bank took liquidity out of the money market arena. The selloff in January which created a drop of over 7.0% was also the result of tightening in the margin requirements by brokers. Official data showed that margin finance hit a record two trillion yuan on Tuesday.

Prior to the drop, the Shanghai Index was up 52.77% on the year and this had allowed emerging market and China-focused hedge funds to lead the way in 2015. After the decline, it will be interesting to see how things shake out. Many economists and investors are concerned that the rally is extremely overblown and fueled by cheap credit and that the underlying economic activity doesn’t justify the extreme run up in stock prices. Kind of sounds like the Nasdaq in the late 90s.

Rick Pendergraft
Research Analyst
HedgeCoVest