China’s Stock Market Turmoil

By PAUL TAGHIBAGI | Special to the Palisadian-Post

On Jan. 7, China halted stock trading for the second time in four days.

The benchmark Shanghai Composite sank 7.0 percent on Jan. 4 and dropped 7.3 percent three days later, both times activating a new circuit-breaker rule that stopped the trading session.

Markets worldwide fell in reaction to these dramatic plunges.

On Jan. 7 alone, Japan’s Nikkei 225 and Germany’s DAX both suffered selloffs of 2.3 percent. On the same day, the Dow Jones Industrial Average dropped below the 17,000 level and the S&P 500 closed below 2,000. While the Dow and S&P respectively lost 2.3 percent and 2.4 percent Thursday, the Nasdaq Composite lost 3 percent and actually corrected from its July record settlement of 5,218.86.

Why is China’s stock market slipping? 

You can cite several reasons. You have the well-noted slowdown of the country’s manufacturing sector, its rocky credit markets and the instability in its exchange rate. You have Chinese concerns about the slide in oil prices, heightened at the beginning of Jan. by the erosion of diplomatic ties between Iran and Saudi Arabia. You have China’s neighbor, North Korea, proclaiming that its arsenal now includes the hydrogen bomb.

Finally, you have a wave of small investors caught up in margin trading and playing the market “like visitors to the dog track,” as a reporter wrote in The New Yorker.

More than 38 million new retail brokerage accounts opened in China in a three-month period in 2015, shortly after the Communist Party spurred households to invest in stocks. Less than 10 million new brokerage accounts had opened in China in all of 2014.

In trying to calm its markets, China may have done more harm than good. 

Chinese officials spent more than $1 trillion in 2015 to try and reassure investors and right now they have little to show for it. Interest rates have been lowered; the yuan has been devalued again and again. The government has also made two abrupt (and to some observers, questionable) moves.

Last July, they barred all shareholders owning 5 percent or more of a company from selling their stock for six months. That ban was set to expire on Jan. 8, and that deadline stirred up bearish sentiment in the market this week. The prohibition was just renewed, with modifications, for three more months.

On Jan. 4, the China Securities Regulatory Commission instituted a circuit-breaker rule that would pause trading for 15 minutes upon a 5 percent market dive and end the trading day when stocks slumped 7 percent or more.

On Jan. 7, the CSRC scrapped the rule amid criticism that it was being triggered too easily; Thursday ended up being the shortest trading day in the history of China’s stock market. In the view of Hao Hong, chief China strategist at Bocom International Holdings, the circuit-breaker rule clearly backfired: it produced a “magnet effect,” with selloffs accelerating and liquidity evaporating as prices approached the breaker.

Quite possibly, China will make further dramatic moves to try and reduce stock market volatility this month. Will U.S. stocks rally upon such measures? Possibly, possibly not.

Paul Taghibagi may be reached at 310-712-2323 or pt@seia.com; seia.com.