ChinaStockExchange_2013
The Shanghai Composite Index plunged 6.5 percent on Thursday, May 28, 2015, in what is being seen as a correction after days of upward movement and ahead of a key IPO. In this photo, investors react in front of an electronic board showing stock information at a brokerage house in Fuyang, Anhui province on Feb. 21, 2013. Reuters

SHANGHAI -- The rollercoaster ride on China’s stock markets, which have more than doubled in value in the past six months, continued Thursday, with the main Shanghai Composite Index plunging 6.5 percent.

However, in a market where individuals -- more than half of whom have only started trading this year -- make up a significant proportion of investors, many analysts suggested that such volatility was to be expected. It followed the market’s rise to a seven-year high earlier in the week, after its biggest single-day rise in four months, of more than 3 percent Monday. Thursday’s fall left the market only slightly lower than where it had started the week.

"It’s a normal correction," Shanghai-based strategist Zhou Lin told the China Daily newspaper. "I think the negative impact on the market could be just short-term."

This boom in the first half of the week saw massive amounts of funds pouring into the market, with daily turnover of more than two trillion yuan -- over $320 billion -- on consecutive days. The government’s announcement of a new mutual fund linking China and Hong Kong markets, a massive program of private investment in infrastructure projects worth an estimated $318 billion, and figures showing a revival in industrial profits following several months of slowdown, contributed to the rise earlier in the week.

A series of comments in the official People’s Daily newspaper from an unnamed “authoritative source,” emphasizing the importance of investment, also buoyed the mood of investors, with much speculation online that the person quoted was in fact one of the country’s top leaders, and that this therefore represented a policy statement.

However with the nation’s biggest initial public offering in five years -- of China National Nuclear Power Corporation-- expected next week, and likely to drain liquidity from the market, and several brokerages implementing new rules restricting margin trading, observers said many investors had decided to take profits on Thursday. Leading financial news website Caixin said institutional investors in particular were growing wary, following comments from China’s regulator last week that more action was needed to crack down on “irregularities” in the market.

Ordinary citizens have poured money into the market in recent months -- enjoying its first significant growth spurt since the boom years of the middle of the last decade -- and some companies have seen their market valuation rise as much as five-fold this year alone.

However some foreign analysts have warned of a bubble -- and one domestic analyst also told Caixin on Thursday that the market was overvalued with “risks now outweighing opportunities” and that, in his view, the market ought to be trading at between 3,000 and 4,000 points, roughly where it was several months ago.

Some Chinese economists have also warned that the market could divert funds from non-listed companies struggling to compete in China’s ‘real economy.’ Yet even after Thursday’s fall, several analysts said they expected the market to resume its rise -- with some predicting further monetary easing, as the government seeks to prevent an economic slowdown.