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China goes on damage control—yet again

China welcomed the new year with yet another bloodbath that it has seen too much of in 2015. But unlike the August 2015 sell-off that was sparked by small jittery players, this time around, macroeconomic fundamentals are making the bears return, and global stock markets are left cowering.

January 07, 2016 | Research

December ended for China's stockmarket with a nearly 8% drop that did not go unnoticed as the year drew to a close. And if anyone did miss December, the 6.9% drop in the Shanghai Composite index, and the 8.2% fall in the smaller Shenzhen Composite in January that pushed trading to be halted twice, the second for the remainder of the trading day, proved the new year party is indeed over. The $6.5 trillion Chinese stockmarket lost $590 billion on January 4.

Asian markets reeled the most. The Kospi skidded 2.2%; the Hang Seng Index fell 2.7%; and the Nikkei dropped 3.1%. This however, was far tamer than the declines last summer, when major Asian indexes plunged around 40% before officials stepped in. That time, the Chinese stockmarket lost $5 trillion.

In the US, the Dow, the S&P 500, and the Nasdaq were all lower by more than 2% shortly after the open.

Individual Chinese investors drive more than 80% of trading, and their sell-off in August largely caused the Black Monday stockmarket crash. The WallStreetExaminer points to rampant speculation and the liberal buying of equities on margin. Today the causes were more than frightened individual investors but weak manufacturing data and a falling renminbi. A lock-up period that has prevented institutional investors from selling was also coming to an end, which increased concerns.

As in August when the government stepped into the equities market by implementing suspension of trading beyond a critical band, policymakers again revived market intervention on January 5, a day after the first bloody trading day of 2016, as state-controlled funds bought equities.

Moreover, the China Securities Regulatory Commission signaled that a selling ban on major investors will remain beyond the 6-month lock-in period. In July, a ban on selling shares was implemented, which was supposed to be lifted on January 8.

China’s latest efforts to rescue its stockmarket ...

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Categories:

Market Developments, Markets & Exchanges, Rmb

Keywords:China, RMB, IMF, Black Monday, India, Federal Reserve