The roller-coaster movement of China's stock indexes in the past weeks has raised eyebrows worldwide, including analysts and portfolio managers in Europe.

Market experts said margin financing - using borrowed money to trade shares, enabling traders to place greater sums in the equities market - and the accelerated pace of initial public offerings have contributed to the volatility of the A-share market.

"The original rise in the markets was way too fast for it to be sustainable, particularly since it was largely fueled by leverage. An additional factor was the government's IPO pipeline which was increasing supplies in the market and causing significant volatility. The markets were still rising by sucking equity out of the markets in the form of IPO deposits," said Robert Davis, a Brussels-based senior portfolio manager at NN Investment Partners.

Davis said that the market started to wobble after the government, through the China Securities Regulatory Commission, issued a warning on margin trading and speculators started unloading their positions to lock in gains.

Hu Jing, an investment manager at Arbuthnot Latham & Co, a London-based private bank, echoed Davis's view and said the market turbulence has created an imbalanced client base.

"Retail investors account for around 30 percent of the overall investor base, contributing to as high as 85 percent to 90 percent of daily turnover from time to time. Due to the lack of investment knowledge, the herd behaviour among retail investors is significant and it magnifies any reasonable market movement," Hu said.

According to Hu, market volatility can also be amplified by the fact that the financial system is still in its embryonic stage and has natural imbalances and limited investment options.

A 30 percent fall in the stock market after a 150 percent surge has meant that many stock investors have suffered losses after making initial gains. Analysts said valuations are always important when buying shares in a company.

"Trading only on momentum and ignoring the fundamentals can work for a while, but in the end the market will wobble and ultimately crash in the absence of good valuations," said Davis.

"Retail investors have to understand that investing in the stock market requires professional knowledge and experience. Blindly entering an order based on rumors is highly unreliable and unrewarding," said Hu.

The government should keep encouraging more institutional investors - domestic and foreign - to participate in the capital market, as their participation will help foster a more balanced environment, Hu said.

But, some fund managers said it is possible that the public demonstration of policy intervention in the market might cause a slowdown or even backtracking of reforms.

Douglas Turnbull, a fund manager at Neptune Investment Management, a fund management company in the United Kingdom, said: "Policymakers consistently demonstrate a great degree of skill in controlling gradual change in their economic environment. The stock markets seem to be an exception to this, as both 2007-08 and 2014-15 would suggest."

The volatility in the stock market may force overseas investors to backtrack on further exposure, as evidenced by global index provider MSCI Inc's decision to not include A shares in its benchmark global emerging markets index.

wangmingjie@mail.chinadailyuk.com

(China Daily 07/20/2015 page16)