China Totters, World Market Crashes
Two
Circuit Breakers at 5% and 7% Fail to Arrest Fall, Investors Exit Amid Signs of Slowing Economy, Weaker Currency
It’s
Quite Unexpected, More Panic Selling?
A Sharp Selloff in Shanghai Ushered in a
Grim Opening Day for Trading World-Wide. Its Economy was slowing and that
Beijing was weakening the Country’s Currency. Support Propping
up the Market could Disappear Soon, as well as the Debut of New circuit
Breakers.
Monday, just one bad day in the normally volatile market helped
send stocks elsewhere tumbling. In the U.S., the Dow Jones Industrial Average
fell 276.09, or 1.6%, to 17148.9, while the S&P 500 lost 31.28, or 1.5%,
2012.66. There is a slight recovery in later period but nothing significant.
The Shanghai market fell 6.9% Monday on the first trading day
of the year, its worst day since the height of last summer’s market crash. The
selloff triggered circuit breakers on their first day in effect, shutting down
the market in the early afternoon.
China’s central bank is planning to inject 130 billion yuan ($20 billion) in short-term funds to help calm jittery
investors after Monday’s sharp stock selloff. By deciding to pump the funds
into the market, the People’s Bank of China is trying to signal to investors
that it hasn’t changed its policy of easement to provide liquidity The Shanghai
Composite opened 3% lower on Tuesday but by late morning, the decline had eased
to 0.5%.
The most obvious factor behind Monday’s selloff was a private
index of manufacturing activity in China, which showed that business had slowed
for the 10th consecutive month for the country’s steelmakers, shipbuilders and
other industries. China is expected to disclose this month whether it hit its
growth target of about 7% for 2015. That would be the country’s slowest growth
in 25 years, and economists say it could set an even-lower target of around
6.5% for 2016.
Another
worry was China’s falling currency, which crossed a key technical threshold as
it hit another nearly five-year low. Monday’s decline in the yuan started after China’s central bank guided the currency
weaker in the morning, setting the midpoint for the day’s trading range at
6.5032 yuan, its weakest level since 2011. China lets
the currency trade 2% above or below that level in its onshore market.
Although the yuan has been
weakening steadily for months, traders say they suspect China has been
intervening in the markets to slow the decline – something that didn’t appear
to happen Monday.
The equity crash in China raised fears of further devaluation
of the yuan by up to 4-5 per cent. The yuan, which is set to be included in the IMF’s special
drawing rights (SDR) basket, has seen a 4.88 per cent drop in value in 2015.
In
one of several frantic moves by Beijing to halt the August 2015 selling, big
shareholders were banned from selling stock for six months. Most analysts
expect Beijing to extend the ban further if the market keeps falling.
China’s market is dominated by fast-trading individual
investors who tend to buy when shares are rising, especially if they believe
the government wants the market to go up, and sell when stocks are falling.
That appeared to be the case Monday and might have been hastened by the
knowledge that the market could shut down if circuit breakers, announced in
December, were tripped.
The circuit breakers first kicked in right after the market’s
lunch break, shutting down trading for 15 minutes after a 5% drop. But as soon
as shares started trading again, the market plummeted, hitting a 7% decline in
just a few minutes. Trading was shut for the rest of the day.
“The circuit-breaker system actually creates a downward
spiral” as more investors get nervous about trying to get out before others,
said Hao Hong, managing director at Bank of
Communications Co. “Having this so-called system in place is actually making
the selling worse.”
When authorities announced the new circuit breaker in
December, they said it was meant to help the market “cool off in order to
prevent the spread of panic sentiment, which may exacerbate volatility.”
Monday
marked a fresh round of volatility for Chinese markets, which have rebounded by
more than 20% from their lows of the summer, when heavy selling eventually
spurred volatility around the globe. Over 1,200 stocks on the Shanghai and
Shenzhen market, or more than 42% of firms trading, fell by the 10% daily
downward limit set by regulators, according to Wind Information.
Market watchers say they aren’t expecting the current fall to
develop into a full-fledged repeat of last year’s plunge. A big difference this
time is that investors have cut back on borrowing money to buy stocks, or margin
loans. During the summer, local investors borrowed money from Chinese
brokerages, which drove shares sharply up, and down, as investors sold stakes
to repay their brokers.
Since then, official margin loans in China’s mainland market
have fallen 49% from a peak of 2.3 trillion yuan in
June.
Margin loans in China have fallen 49% from their peak in
June.
In the aftermath of the financial crisis of 2008-09, China
stood tall to carry the world on its shoulders. With the global economic
outlook muted this year, China’s slowdown is an extremely worrying sign for the
world economy.
“The difference between 2008 and 2015-2016 is that at that
time the recovery was driven by Chinese demand.