Updated: August 25, 2015 5:22:58 am
China’s benchmark Shanghai Composite Index fell 8.5% to 3,209.91 at close on Monday, wiping out all its gains in 2015. The Hong Kong stock exchange Hang Seng China Enterprises Index fell 5.8% to 9,602, its lowest level since March last year. The Shenzen Component Index fell 7.83%, CSI 300 8.85%, and the ChiNext Index, tracking China’s Nasdaq-style board of growth enterprises, lost 8.08%. Nearly 2,200 stocks fell by the daily limit of 10%, Xinhua reported.
The sharpest fall in China’s stocks since 2007 came despite Beijing’s latest attempt to support the equity market, an announcement on Sunday that it would allow pension funds to invest 30% of their total net assets of over $ 547 billion in stocks. In earlier attempts to shore up the market, China had banned selling by major shareholders, told state-owned companies to buy stocks, suspended new listings, slashed interest rates deeply, and gone after illegal short-selling and rumour mongering. For a while these steps appeared to work, but the bears returned — the Shanghai Index lost 11.5% of its value in five trading sessions last week, and after Monday’s crash, has fallen 38% from its June 12 peak, a $ 4 trillion wipeout of value. As per Bloomberg’s monthly GDP tracker, China’s growth rate slowed to 6.6% in July. On Friday, the Caixin Markit ‘flash’ manufacturing PMI sank to 47.1, the lowest in 77 months, indicating a serious slowdown in factory output, for decades the driver of Chinese growth.
In the background of the current turmoil lies the unusual rise in Chinese markets for about a year until June, as investors — most of them ordinary Chinese — poured large sums of money into stocks, even though both growth and corporate profits were weak. The detachment from the reality of China’s slowing economy led to overvaluation of the market, and the creation of a classic bubble, which finally burst on June 12. Small retail investors have been the worst hit by the crash. Many had borrowed to invest in the market, and some were reported to have even sold homes to join what they believed was a party that would quickly make them rich.
However, Beijing will keep doing its best to minimise the damage to the real economy, and it still has policy tools to boost growth. The Chinese central bank, the People’s Bank of China, could devalue the yuan further, cut interest rates, and lower the amount banks are required to keep on reserve, making it cheaper to take loans, and easier for banks to lend. The government will also work towards increasing infrastructure spends, and perhaps cut some taxes. According to economists, stocks account for only 15-20% of the wealth of Chinese households, and the mayhem may not be able to make a huge dent in spending by consumers.
Acoss the world, alarm bells rang on Monday. European stocks slumped, wiping hundreds of billions of euros off leading shares and sending the benchmark pan-European FTSEurofirst 300 index to its lowest level since January by mid-session. Safe-haven government bonds and the yen and the euro rallied as widespread fears of a China-led global economic slowdown and currency war kicked in. Fears of a Chinese downturn have hammered the prices of commodities like iron ore and copper this week, and countries like Australia and Brazil have been badly hurt by the fall in the Chinese demand for raw materials.
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