China plunge could shake world markets

January 8, 2016 10:00 pm

 A
woman reacts near a display board showing the plunge in the Shanghai
Composite Index at a brokerage in Beijing, . Photo / AP

The latest trigger was currency jitters, but Thursday’s plunge in
Chinese stocks was just one in a series of aftershocks from last year’s
boom and bust that could shake markets for months to come.
Investor
anxiety over economic weakness and a possible glut of unwanted shares
flooding the market have complicated Beijing’s efforts to withdraw
emergency controls imposed after Chinese stock prices collapsed in June.
On
Thursday, trading halted for the day after a stock index fell 7 percent
a half-hour into the trading day. It was this week’s second daylong
suspension after a plunge in prices Monday tripped the same “circuit
breakers” that were introduced Jan. 1.
Regulators suspended use
of the “circuit breaker” effective Friday after economists warned it
might be adding to volatility. They said trading was halted too often
and the mechanism accelerated declines by encouraging investors to sell
quickly before they were locked out. According to IHS, the mechanism
would have been tripped 20 times if it had been in place in the final
quarter of 2015.

The benchmark Shanghai Composite Index more than doubled
between late 2014 and June, then dived 30 percent. Supported by a
multibillion-dollar government intervention, the market rose almost 25
percent in the final months of 2015, only to collapse in the new year.
That left the main index down 15 percent from its December peak.
Wild
price swings could continue through the first half of this year,
according to financial analysts. Even after the latest declines, the
Shanghai index is up 36 percent from October 2014.
The turmoil in
China triggered a sell-off in Asian and Western stocks. Beijing keeps
its markets sealed off from global capital flows, but due to the vast
size of China’s , foreign investors watch them closely and react
to volatility.
“The market still is trying to find a bottom, and
that takes time,” said Chen Yong, a strategist at Lianxun Securities.
“The key is to be able to resume normal daily trading, and during that
time volatility is inevitable.”
The upheaval disrupted the ruling
Communist Party’s plans to use the stock markets as a tool to make
China’s state-dominated economy more competitive and productive.
Economic
growth fell to a six-year low of 6.9 percent in the July-September
quarter and is forecast by the International Monetary Fund to decline
further to 6.3 percent this year. Monday’s stock price plunged was
triggered by surveys that showed manufacturing in December was weaker
than expected.
The latest bout of selling was fueled by concern Beijing is letting China’s yuan weaken too fast against the dollar.
The
yuan, also known as the renminbi, has drifted down by 6 percent against
the U.S. currency since the central bank adopted a mechanism in August
it said would make the state-set exchange rate more market-oriented.
The
yuan’s link to the dollar meant it soared as the U.S. currency climbed
over the past year, making it overvalued by 10 to 15 percent against
those of other developing countries. But the prospect Beijing would
close such a large gap fueled fears it might lead to an outflow of
capital, weakening China’s economy and reducing the supply of money to
support share prices.
Thursday’s exchange rate of 6.5646 yuan to the dollar was the lowest since March 2011.
“The
government hopes to see the yuan depreciate to stimulate exports and
the economy, but the speed of depreciation went too fast,” said analyst
Zhang Gang of Central China Securities.
The White House said the
U.S. was closely monitoring China’s currency. White House spokesman Josh
Earnest said the U.S. approach to the uncertainty was to continue
pressing China to speed up the pace of economic reforms he said would
benefit China long-term and help the global economy.
Investors
also were skittish about the impending end Thursday of a six-month ban
on share sales by any stockholder who owns more than 5 percent of a
company, according to Zhang.
Regulators tried to head off such
concern by announcing earlier in the week major shareholders could sell
only in private transactions to avoid flooding the market. After
Thursday’s market plunge, the securities agency tightened that
restriction by saying they can unload only the equivalent of 1 percent
of a company’s shares over the next three months.
“Additional
volatility in China’s stock market remains almost certain in the first
half of 2016,” said economist Brian Jackson of IHS Global Insight in a
report. “China’s stock market reform will remain a messy affair.”
Chinese
leaders encouraged novice investors to pile into stocks beginning in
late 2014. They wanted to raise money for state companies to pay down
heavy debt loads and become profit-oriented and competitive. Communist
planners also hoped investing would help families save for retirement,
easing the pressure on Beijing to pay for pensions and health care.
Those
plans went wrong when markets soared faster than Beijing wanted. By
May, state media that cheered on higher prices started to mix in appeals
for investors to act prudently.
After prices plunged in June,
the government banned sales by big shareholders, ordered state companies
to buy stock, cut interest rates and canceled initial public offerings.
The
government has yet to say what its intervention cost, but Goldman Sachs
has estimated state entities spent 860 billion-900 billion yuan ($135
billion-$140 billion) to buy shares in June and July.
– AP researchers Yu Bing in Beijing and Fu Ting in Shanghai and writer Josh Lederman in Washington contributed.

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