China Stocks Recover Part of Last Week’s Rout

Chinese shares recovered somewhat on Monday after suffering from their worst five-day trading period since January 2016, stabilizing from last week’s sell-offs triggered by global market turmoil.

The Shanghai Composite Index, the benchmark index, rose 0.78% to 3,154.13 points by the close of trading Monday, after initially falling 0.45% during the morning session. The Shenzhen Component Index rebounded by 2.91%, while the Nasdaq-style startup board ChiNext gained by a bigger 3.49%.

Large caps, including China Southern Airlines Co. and Kweichow Moutai Co., gained 3.23% and 2.1% respectively on Monday, reversing their losses on Friday.

Shanghai shares posted their worst weekly performance in two years last week, retreating 9.6% in the wake of corrections in the U.S. and other global markets that themselves were reacting to fears of returning inflation. Mainland equity markets were hit as investors dumped small caps on Feb. 6 as pressure upon margin calls mounted, and then extended their sell-offs into blue chips Friday on panic selling.

The Shanghai Stock Exchange said late Friday it had issued warnings and trading restrictions for investors who generated large sell orders. The China Securities Regulatory Commission, the country’s top securities regulator, didn’t comment on the market turbulence during its routine media conference on Friday.

Analysts and market participants attributed the turbulence to a slew of factors: growing margin calls, lack of support from state-backed funds nicknamed “The National Team,” and the government’s deleveraging campaign that has tended to squeeze out risky stock investments.

The China Securities Depository and Clearing Corp. said 700 listed companies on the Chinese mainland had pledged more than one-third of their shares for loans. The total number of listed firms in China is more than 3,400.

To avoid forced selling by shareholders of small firms that had pledged shares as collateral for loans, 342 companies listed in Shanghai and Shenzhen suspended trading as of Friday, seeking shelter from the market turbulence, according to information provider Wind Info.

Several other some companies — including Sichuan Langsha Holding Ltd., a knitted fabric producer — chose to buy back the shares they pledged in easing investor concerns. Langsha said it had called off the pledge of some 30.9% of its floating shares, according to an announcement filed to the Shanghai Stock Exchange on Friday.

Still, investor sentiment is unlikely to tick up dramatically anytime soon, as China markets will be closed on Thursday as the weeklong Lunar New Year holiday begins, analysts said.

Contact reporter Leng Cheng (chengleng@caixin.com)