Market participants generally expect the sharp declines indicate mainland Chinese stocks have hit a bottom, or could recover, Nanhua’s Yao said.
But the volatility in mainland Chinese stocks indicates how the local financial environment is still developing.
The Chinese stock market should offer price discovery of businesses, financing through capital markets and profit dissemination, but so far the market hasn’t exhibited those three characteristics that well, Zheng Xinli, executive chairman of the China Policy Science Research Association and vice chairman of the China International Economic Exchange Center, said during a presentation at Renmin University on Thursday.
Zheng noted one of the ways for China to address its debt issues could be by turning more to capital markets.
In contrast to the U.S., where institutions play a prominent role in trading, the mainland Chinese market is dominated by retail investors, who can be more emotional with their trades.
“The stock market still needs a lot of structural reform,” Ning Zhu, professor of finance at Tsinghua University and deputy director of the National Institute of Financial Research, said in a phone interview Friday. “The most important thing is the regulators shouldn’t create this false sense of security, especially for retail investors. This can be taken as a good chance for further investor education. They wouldn’t be convinced unless investors faced real losses.”
The China Securities Regulatory Commission could not immediately be reached for comment by phone on Friday.
The Shanghai composite rose 0.9 percent Friday, but its plunge this week is striking when considering the index’s historical tendency to rise following the National Day holiday, a week-long commemoration of the founding of the People’s Republic of China on Oct. 1.
In the last decade, the only declines in the five trading days following the end of the holiday were a 0.19 percent fall in 2014 and a 12.78 percent drop in 2008, according to data provider Wind Info. On the eight other instances, including the last three years, the Shanghai composite has gained nearly 1 percent or more, the analysis showed. This year broke that trend.
— CNBC’s Chris Hayes contributed to this report.