China enters bear market with 30 percent drop in three weeks

China entered bear market territory today with the Shanghai Composite Index suffering a painful drop of 125 points or 4.3 percent, ending the day at 2785.5.

This slide increases the index's losses to nearly 30 percent over the last three weeks as investors pull out of what has become an overheated market. It has been an abrupt end to its six-month rally. Word that the Chinese regulators may not step in to prop up the market has only intensified these jitters.

China's markets had been buoyed by a 4 trillion yuan ($585 billion) stimulus package. An estimated $70 billion of bank loans were invested in stocks over the first five months of the year. This record lending, much discussed in the blogosphere, has artificially propped up the markets, creating an impossible-to-sustain situation if the government now tightens its purse strings.

The mood has soured so much that even yesterday's high-flying IPO, China Everbright, has been punished. China's first brokerage to go public in nearly seven years soared 30 percent on Tuesday, then plunged 10 percent today -- the maximum drop allowed before trading is halted for the day. This rocky ride is hardly an auspicious start for a stock that had been launched with such high expectations.

The brutal decline in the Shanghai market was mirrored by a plunge in the Shenzhen Composite Index (China's second market), which fell 4.9 percent to 921 Other Asian markets fared better but were still jittery as mainland China's market swooned.

Hong Kong's Hang Seng Index dropped 1.7 percent to 19,954, hitting its low for the month. Japan's Nikkei Index swung from gains to losses at least 10 times throughout the trading session before finally settling at 10,204, down .79 percent.

Asia analysts now worry that the markets' recent gains aren't justified by actual corporate profits. That means Warren Buffett's declaration this week that we are now on the "slow path to recovery," may sound a bit dubious if you're facing East.

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