China Stocks Move Towards its Worst Week

China’s stocks are moving toward their worst week in over a year, as a sell-off in small-caps rippled across the broader market amid a perfect storm of events including an executive’s suicide, huge corporate losses, and a shadow-banking squeeze.

China stocks to head straight for their worst week.

On Friday, over 40 companies suspended their trading to prevent margin calls. While a growing number of firms announced their share purchase schemes by shareholders, stirring memories of a wild sell-off two years ago, when shares collapsed amid fears of an economic slowdown and capital outflows.

The benchmark Shanghai Composite Index regained early losses on Friday to edge up 0.2 percent, but was still poised to post a weekly drop of roughly 3 percent, its biggest percentage loss since December 2016.

Meanwhile, the blue-chip index CSI300 has fallen 2.7 percent this week.

The faith of investors in small caps has been shaken following a wave of profit warnings and an eye-popping $1.8 billion annual loss flagged this week by the struggling Leshi Internet, which was formerly seen as a ChiNext bellwether.

The general manager of Shanghai Wisdom Investment Co. Ltd, David Dai, stated that he no longer dares to buy small caps amid the increasing signs of “bloodbath accounting,” where companies unexpectedly conduct a huge write-offs during bad years to wash the books.

“There’s a real danger of stepping on the landmines, as companies seem to be able to change their accounting treatment at will,” stated Dai.

“Many growth companies nowadays cannot even outgrow bluechips such as Moutai,” Dai added, referring to the Chinese premium liquor maker that forecasted a 58 percent profit surge last year.

However, the combined profit of ChiNext companies went down 5.5 percent last year, compared with 7.8 percent growth at Chinese banks, according to an estimate by GF Securities.

Dai also expressed his concerns over an upcoming wave of margin calls if the prices of share decrease further, which could tighten liquidity conditions even as regulators expand their campaign to lessen risks in the financial system.

Highlighting the rippling effect, the death of Zhou Jiancan, the Chairman of the Zhejiang Jindun Fans Co, this week triggered rumors of a failed investment in Leishi, whose shares have been in a free-fall.

According to the statement of the company on Thursday, the death of Zhou was not related to the alleged Leshi investment.

But the company has disclosed that most of all Zhou’s holdings in the company, roughly 26 percent of total shares, are pledged against loans, and that his son will be liable for dealing with margin calls if they are triggered by further price drops.

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