CHINA, JAN 7 – Markets around the world were in tumult on Thursday after the Chinese authorities imposed measures designed to prevent panic selling of stocks for the second time in four days. Prices for stocks and commodities dropped sharply, while bonds and so-called haven currencies rallied in a replay of the August market violence prompted by concerns for the health of the world’s second largest economy.
Share trading in China was halted for the day after the benchmark Shanghai index dropped 7 per cent within half an hour of the market open, the second time so-called circuit breakers were tripped this week. In four days this year the blue-chip CSI 300 index has lost 12 per cent.
The Chinese regulator announced late in the eveing local time that it had suspended the circuit breakers altogether. Critics said the mechanism may have amplified losses, as investors rushed to exit their positions for fear of being trapped in the event of a trading halt.
The plunge in Chinese stocks came after the central bank cut the daily fixing rate around which the renminbi is allowed to trade to the weakest in four years, and disclosed the scale of recent spending to prop up the currency in a sign of continued capital flight. China’s FX reserves fell $108bn in December to $3.33tn, according to central bank figures released on Thursday, bigger than the $87bn slide in November. Reserves peaked at $3.99tn in June 2014, but have fallen for 13 of the past 15 months.
The news from China rippled through global markets, sending the oil price to a fresh 11-year low beneath $33 a barrel for Brent Crude. In Japan the Topix index of shares closed down 2 per cent, while most European markets posted deeper losses, with the German Dax index falling 3.5 per cent and the FTSE 100 down 2.9 per cent.
In volatile foreign exchange markets, a New Year climate of fear pushed investors away from currencies deemed risky to hold. Asian currencies and those of commodity-exporting currencies fell against the US dollar, while sterling, vulnerable to market sentiment about a possible vote on EU membership, plumbed a five-year low.
Investors were rattled by further weakening of the renminbi, said Wang Jun, analyst at China Securities in Beijing. “It was a panicked response to the forex market,” he said. “Accelerating exchange-rate depreciation could lead to liquidity problems. Valuations can’t help but take a pounding.”
In a sign of the jitters spreading around the world, more than 200 European clients of Citigroup dialled into a 7:15am GMT conference call today. Policymakers appear uncertain about whether to wade back in to buy stocks with state funds or to stand back. On Tuesday, the “national team” of state-owned financial institutions appeared to re-enter the stock market after remaining on the sidelines since late August.
Goldman Sachs estimated in September that the government had spent Rmb1.5tn ($234bn) to support the stock market in July and August, when the main index fell by as much as 45 per cent from its mid-June high. The “national team” owned at least 6 per cent of tradeable market capitalisation in the Shanghai and Shenzhen exchanges at the end of the third quarter.
On Wednesday, the stock market had clawed back some lost ground after state media said the securities regulator would extend a ban on share sales by large shareholders. After the trading halt on Thursday, the regulator published new permanent rules restricting share sales by large shareholders, as well as by corporate management and directors.
Starting on January 9, large shareholders can sell a maximum of 1 per cent of a company’s shares every three months. They also must disclose stake-cutting plans 15 days in advance. The China Securities Regulatory Commission said the new rules should help to stem panic-selling.
Forex traders on Tuesday reported signs that the People’s Bank of China, acting through large state-owned banks, was drawing on its foreign exchange reserves to support the renminbi. But the currency’s decline continued on Wednesday, and authorities now appear reluctant to devote further resources to rescuing the stock market. The securities regulator said in August that the government would halt large-scale stock purchases, though it did not rule out occasional intervention.
