Panic Spreads As Chinese Stock Market Closes Again Because of Massive Drops in Stock Prices

World stock markets slide as panic in China spreads

Simon Denyer, Wall Street Journal, January 7, 2016

BEIJING — Global stock markets fell for a sixth day Thursday as another collapse in China’s ailing share market spread like contagion across the world.

It all began in a flash.

China’s share market traded for less than 30 minutes Thursday, slumping 7 percent before triggering the second emergency market closure this week and generating talk of a crisis.

Against a backdrop of a weak economy and, some argue, an overvalued currency, confidence in China had long been in short supply. But investors also blamed ill-considered and poorly explained moves by the authorities for fueling the panic this week.

Market confidence was dented early Thursday by a sharp devaluation in the Chinese currency, because it was interpreted as a sign that the authorities are becoming increasingly rattled about the nation’s ailing economy.

Weak economic data had sent share prices plunging precipitously on Monday, and government intervention to prop up the market by buying shares the following day did little to restore investor confidence.

“The bottom line is the market is not supported by fundamentals,” said Andy Xie, an independent economist based in Shanghai. “People in the know want to get out.”

The CSI 300 index of companies listed in Shanghai and Shenzhen fell 7.2 percent in morning trade, triggering a halt in trading for the remainder of the day. In Tokyo, the Nikkei 225 index fell 2.3 percent, its fourth straight daily fall, to record its worst start to a year since 2000. The MSCI Index of Asian shares excluding Japan fell 2.2 percent to a three-month low.

In Europe, the FTSE-100 index fell 2.5 percent in early London trading, while Germany’s Dax index slipped 3.5 percent. In overnight trading, the S and P 500 index futures in the U.S. were 2.2 percent lower.

Influential investor George Soros said China had a “major adjustment problem” on its hands. “I would say it amounts to a crisis,” he told an economic forum in Sri Lanka, according to Bloomberg. “When I look at the financial markets, there is a serious challenge which reminds me of the crisis we had in 2008.” 

In an attempt to shore up sentiment, China’s securities regulator issued new rules on Thursday to prolong restrictions on share sales by major shareholders. The move could help slow selling but was unlikely to stem it, experts said.

On Thursday, the People’s Bank of China surprised the markets by setting the yuan’s official midpoint rate at 6.5646 to the dollar, around 0.5 percent weaker than the day before and the lowest rate since March 2011. That has reignited fears that China wants to devalue its currency to stimulate exports, and this could provoke other countries to follow suit.

“The largest one-day weakening in the Chinese yuan mid-point since August has put China devaluation concerns and a global deflationary crisis front-and-center in investors minds,” Angus Nicholson, a markets strategist at IG Securities in Melbourne wrote in a note to clients. “The efficacy of China’s new equity ‘circuit-breakers’ has also been greatly called into question, and their days are looking numbered.”

China’s CSI 300 had only traded for 14 minutes before the first circuit breaker kicked in, calling a 15-minute halt to trading after a 5 percent fall. But instead of calming the market, it only caused more panic, and when trading reopened prices soon fell further, triggering a halt for the rest of the day.

“The circuit breaker mechanism is only accelerating and escalating the panic in the market,” said Wu Xianfeng, president of Longteng Asset Management in Shenzhen. Wu agreed with Xie that the market was overvalued, that major shareholders wanted to sell and that the trend was not going to improve. But the circuit breaker mechanism was not helping, he said.

The market is so volatile it can easily fall two or three percent in an instant, he explained. When it does, everyone starts to panic that the circuit breakers will soon kick in and they won’t be allowed to close out their positions — so they rush to sell while they still can.

The circuit breaker system only came into effect at the beginning of this year but has already been triggered twice. It was time for the government to abolish it, Wu said, also urging authorities to release more information to investors, and brief the market better about its policy moves.

“The government should listen to the opinions from the market more,” he said. “You can’t just work behind closed doors and act blindly. The implementation of a national policy needs participation from investors. The government can make mistakes. But in the process, it must reflect on past experiences.”

In the United States, trading in the S and P 500 index is halted temporarily after declines of 7 percent and 13 percent, and only suspended for the rest of the day if losses reach 20 percent.

“Things in China are indeed very strange. The problem is obvious, the relevant department is just unwilling to correct it,” Qiu Xiaohua, chief economist at Minsheng Securities posted on the Sina Weibo microblogging service. “The reality is very clear, if the circuit breaker mechanism is continue to function, the stock market crash won’t stop.”

Deng Ge, spokesman for the China Securities Regulatory Commission (CSRC) haddefended the system Tuesday, saying it had helped provide a “cooling off period” the previous day. He said it might take some time for the market to get used to the new rules, but said the authorities would “improve” the system depending on how it operated.

On Thursday, the CSRC tried to restore confidence by announcing that major investors would be permitted to sell no more than 1 percent of a company’s shares on the open market every three months. The rule, which comes into effect January 9, replaces an existing six-month ban on any secondary market sales that was due to expire Friday. It does not mean state funds will exit from the market and there will be no change to their role in stabilizing share prices, the regulator added.

“The new rules will help form stable market expectations and defuse panic sentiment,” the CSRC said in a statement. “The implementation of the new rules will not lead to waves of selling and there’s no basis that they will lead to sharp declines in the stock market.”

At Renmin University of China, Zhao Xijun, deputy dean of the School of Finance, said the move would remove one of the uncertainties that had plagued sentiment this week, and would play a “positive role in restoring investor confidence.”

But Andy Xie said the move would not change the fundamentals that lay behind the market’s fall.

“It doesn’t matter how government acts to save the stock market, the market is still going to keep falling,” he said.

“Major shareholders are all hidden. They won’t reveal that they are major shareholders. All these policies are just taking in retail investors, and they won’t work.”

Last year’s currency devaluation, stock market collapse and subsequent heavy-handed attempts to prop up share prices dented global confidence in the competence of China’s economic managers, especially in their ability to manage sophisticated financial markets. This week’s events prompted a fresh volley of criticism.

Some investors argued that the government’s attempts to buy shares was only encouraging investors to bet against them, while others said measures to prevent shareholders selling shares were just undermining confidence further.

“This is crazy,“ Alberto Forchielli, founder of Mandarin Capital Partners told Reuters. “Chinese regulators set off on this path in July and they cannot getout of it. They have ruined whatever hope investors still had in the market.”

Foreign exchange traders were barely happier. “China isn’t communicating its policy intentions in a clear manner,” Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong told Bloomberg. “It’s disappointing that their communication policy is less than transparent

Now, the risk of China’s woes spreading across the globe have resurfaced.

“It’s like a replay of the same things that moved the markets in August,” Benjamin Dunn, president of Alpha Theory Advisers told Bloomberg. “We’re perhaps getting confirmation that China is as bad as people think. We’ve lost the tail winds from the Fed and investor enthusiasm and this adds to the mosaic of fear that’s out there right now.”

The World Bank cut its global growth forecasts for this year and 2017 on Wednesday, citing concerns over China’s economy and its impact on commodities. Falling oil prices are also undermining investor confidence and fueling fears of disinflation.

But amid all the talk of crisis and panic, some experts took a more sanguine view.

At Lombard Street Research in London, senior economist Richard Batley said the market should have been expecting a yuan devaluation, after the central bank said last month it would be targeting the yuan’s value against a basket of currencies. Against that basket, the yuan appreciated by more than 3 percent last year and is overvalued, he said. “So yuan weakness against the dollar should not be seen as evidence of weakening Chinese growth,” he said, “but of the global economy returning to a sustainable equilibrium.”

At Capital Economics, Mark Williams said that big moves in China equities may grab the headlines but they don’t have much impact on the Chinese economy, or for economies elsewhere.

“Retail spending actually accelerated in the aftermath of the equity implosion last year,” he said. “Global investors usually overreact to bad news from China’s equity markets so falls in Shanghai cause waves elsewhere. But a fall in Shanghai equity prices tells us next to nothing about the outlook for corporate earnings, even in China, so it shouldn’t have a lasting impact on share prices in the U.S. or Europe.”