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'Black Monday' on Chinese stock market as shares plummet by more than 8% and the world’s second biggest economy continues its freefall

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'Crisis': China's market has closed on a 'Black Monday' that saw the worst day of trading since the start of the global financial crisis eight years ago


'Black Monday' on Chinese stock market as shares plummet by more than 8% and the world’s second biggest economy continues its freefall

  • Chinese stocks have plummeted in the worst day of trading since 2007
  • Shanghai index fell more than 8 per cent, losing all gains for previous year
  • Initiative to allow investment from pension funds failed to prevent freefall
  • Knock-on effect being felt across the world, in UK, Australia and Europe

Mail Online
By Imogen Calderwood
24 August 2015

Chinese stocks plummeted in a ‘Black Monday’ crash that saw the worst day of trading since the start of the global financial crisis eight years ago.

A dramatic fall today has sent the global market into panic, on the heels of last week’s serious losses.

The Shanghai index crashed more than 8 per cent in morning trading, effectively shedding all its previous gains for the year.The fall has spanned every corner of the market in China, the world’s second largest economy, with small-cap growth stocks and state-owned blue chips dropping at roughly the same rate.

‘Markets are panicking,’ said Takako Masai, the head of research at Shinsei Bank in Tokyo.

‘Things are starting to look like the Asian financial crisis in the late 1990s. Speculators are selling assets that seem the most vulnerable.’

Even a last ditch attempt to rescue the market by introducing investment from pension funds failed to limit the serious losses as investors continue to flee the equity market.

‘It’s difficult to judge whether investors are overreacting, or whether the market is near its bottom,’ said Alex Kwok, analyst at China Investment Securities in Hong Kong, noting that economic fundamentals remained weak and investor sentiment battered.

‘This is already a small-scale stock market disaster. Any rebound, if there is any, could be just technical.’

Losses seemed to be limited only by China’s emergency brake, an initiative that limits individual shares from falling by more than 10 per cent in a single day.

This was further aided by the fact that a substantial number of stocks still remain suspended from trading.

By the end of the midday session, only 11 companies trading in Shanghai and Shenzhen were still in positive territory.

The fall came after Beijing failed to make a strong policy move over the weekend to support stocks, has had been looked for after an 11 per cent plunge last week.

Investors had predicted that the People’s Bank of China (PBOC) would cut the amount that banks must keep in reserve – the reserve requirement ratio (RRR).





Panic: Markets are panicking after a last ditch attempt to restore the market, by allowing pension funds to invest for the first time, failed to limit losses


Failure to act: The fall came after Beijing failed to make a strong policy move over the weekend to support stocks, has had been looked for after an 11 per cent plunge last week


By reducing this amount, it frees up money that banks are then free to lend, boosting stocks by increasing market liquidity.

But no such move materialised.

The only policy support introduced was the decision to give pension funds managed by local governments the go-ahead to invest in the stock market for the first time.

These could previously only invest in bank deposits and treasuries, but will now be able to invest up to 30 per cent of their net assets in stocks, equity funds and balanced funds.

According to Chinese state media, pension funds control assets of more than two trillion yuan (£205billion/$322 billion) that could potentially be invested.

This could give the stock market a potential boost of about 600 billion yuan (£62billion/$97 billion).

But enthusiasm for the scheme, which had been trialled in June, was lacking and did little to prevent the drop in Monday’s trading.

‘Chinese pension funds going into the market is obviously good news, but it’s not new news. It has been mentioned previously,’ Stephen Ma, head of greater China equities at BMO Global Asset Management, told CNBC.

‘Over the long run, it will be great, because the Chinese stock market is dominated by retail investors. So bringing in more institutional market into the volatile market but it’s for the medium, long run.’

He added: ‘Real interest rates have been very high in China, they should focus on cutting interest rates or the RRR, that should improve consumption and corporate earnings.’





Knock-on effect: While the current drop could be described as a natural levelling-out, after the Chinese market rose a massive 150 per cent in the past 18 months, the drop has taken its toll across the world


The offshore yuan market also came under renewed pressure, as global investors jumped ship in favour of safe havens.

A shock devaluation of the onshore yuan on August 11 pushed offshore investors to begin moving out of the currency in anticipation of further declines.

Offshore yuan was trading at a 1.04 discount to the onshore spot rate at 6.4648 per dollar.

‘The dim sum bond market has been under pressure since the central bank weakened the yuan sharply,’ a fixed-income trader at a Chinese bank in Hong Kong told Reuters.

‘We see selling mainly coming from private banks and funds that may be facing redemption requests from clients.’

While the current drop could be described as a natural levelling-out, after the Chinese market rose a massive 150 per cent in the past 18 months, the drop has taken its toll across the world.

The Australian market saw it’s biggest one-day fall since September 2011, taking a massive £38billion ($60billion) off the overall market value.

After an hour of trading in the City the FTSE 100 has already plunged 2.8 per cent, falling below the 6,000 point mark for the first time since the start of 2013.

Meanwhile across Europe, stock markets are deep in the red.

Germany’s DAX index has fallen by 3 per cent, dropping below the 10,000 point mark for the first time since January.

Spain’s IBEX is down 3.3 per cent, Italy’s FTSE MIB is down 3 per cent and the Portuguese PSI has shed 4.4 per cent.

‘The People’s Bank of China remains in “see what sticks” mode, and so far nothing has been able to provide an adequate tourniquet for the market-wide bloodshed that has only intensified this Monday,’ wrote Connor Campbell of City firm Spreadex in his morning research note.

‘The latest move by the PBOC saw the central bank announced that local government-managed pension funds will be able to invest in the markets for the first time, in an attempt to pour billions of yuan into an equity market that is currently drowning in losses.

‘However this move only inspired panic not peace, and the fervent selling, with investors fleeing in droves, infected the Western indices from the moment the bell rang.’

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WHAT'S HAPPENING IN CHINA AND WHERE CAN THE ECONOMY GO NEXT?

What has China done to try to stop shares falling?

A range of measures were introduced last month after Shanghai stocks slumped more than 30 per cent from their mid-June peak. But their impact has since evaporated.

The government’s early July rescue package included funding the state-backed China Securities Finance Corp (CSF) to buy stocks on behalf of the government.

Other measures include barring ‘big’ investors from selling their stakes and cracking down on short-selling – when investors bet prices will go lower.

On Sunday, authorities said the state pension fund would be allowed to invest 30 per cent of its total assets – which according to the official Xinhua news agency amount to 3.5 trillion yuan (£350billion/$550 billion) – in shares.

Beijing has also cut interest rates and issued a shock devaluation of its currency of nearly 2 per cent on August 11, causing the yuan to fall almost 5 per cent over that week, which should give exporters a boost.

Where next for China’s stock market and currency?

Despite major efforts to support the market, analysts say shares are likely to go still lower.

The yuan is widely expected to weaken further against the US dollar, although the central bank is expected to intervene to prevent steel slides.

Why are financial markets so gloomy about the Chinese economy?

China's economy expanded just 7.4 per cent last year, its weakest since 1990, and growth has slowed further this year, measuring 7 per cent in each of the first two quarters.

It is a far faster growth rate than most other major countries, but the yuan move raised suspicions that the state of the economy is worse than officials have revealed.

China's second quarter gross domestic product (GDP) figure exactly met the government's full-year target of ‘around’ 7 per cent, leading some analysts to question the announcement, which came after several weak indicators. China has long faced accusations that the government massages economic figures during times of slowdown.

Why is slowing growth such a problem domestically?

Experts say China’s ruling Communist Party needs to deliver improved living standards, lifting more people out of poverty and satisfying the growing middle class, in exchange for acceptance of its rule.

The government also needs to maintain a minimum level of economic growth, which some analysts put at 7 per cent, in order to create jobs for millions of people and prevent social unrest.

Why is slowing growth a problem internationally?

With Europe’s economy weak and the US preparing to raise interest rates, the world has looked to China’s thirst for raw materials to keep finances humming.

With more than 1.3 billion potential consumers, the country is also a big market for manufactured goods such as cars.

Any weakness in demand could be keenly felt by producers.

Is the panic justified?

Analysts are unable to agree. Many insist that China can still deploy further interest rate cuts and spending measures.

‘We continue to believe that sentiment is currently overly downbeat and that policy support will limit the downside risk to economic activity over the course of the next couple of quarters,’ said Capital Economics.

AFP

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