Senior analyst Luke NG runs through what has been happening in the Chinese equity markets, and why investors should expect further turmoil in coming weeks.

Luke says: “Chinese equities in particular A-Shares were in a strong rally in the second quarter of this year, and the market peaked out mid-June. Through this rally, the mainland retail investors, who were also the dominating players in the A-share market, were borrowing record amounts of money to purchase stocks.

"The reversal in the second half of June triggered a “snowball effect” as investors were forced to engage in a series of market sell-offs in order to repay the margin debts. In response to this, the Chinese government and the People's Bank of China intervened by cutting reserve requirement ratio, suspending initial public offerings, launched a market stabilisation fund by major brokers and banned major shareholders from selling stocks in the market. Despite their efforts, the outcome of these measures were ambiguous.

“Sentiment further deteriorated after the PBOC took steps to devalue renminbi mid-August, which triggered additional concerns over a worsening slowdown in the Chinese economy. The Caixin PMI released over the weekend has fallen to the lowest level since 2009 - which further weighed downon on Chinese equities today, this is despite of the latest announcement that the state pension fund is now allowed to invest into the stock market.

“Investors will be worried over several issues including the possibility of economic hard landing, capital outflows, free-fall in equity market intensifying, and which will further panic Chinese investors, and even regional and global investors. As uncertainties remain, the Chinese equity market is likely to stay volatile in shorter term.”

Luke NG is a senior analyst at FE Research, and is based in Hong Kong.