PANIC IN CHINA?
For second time this week, trading grinds to a halt after 7% drop
BEIJING — When China’s stock markets lurched to a halt Thursday for the second time in four days — after just 14 minutes of active dealing and a 7% drop — stockbroker Yang Xu’s day was just getting underway.
“People are super-panicked,” said Yang, who works for China Galaxy Securities Co. “This trend won’t halt in a short time. Prices will continue to drop.... They should get out of it right away.”
If Yang’s clients take his advice and others follow suit, China’s stock markets — and others around the world — are sure to be in for more white-knuckle days. Although many experts say China’s equity markets are more speculative and less reflective of the “real” economy than in other countries, the rough start to 2016 has only exacerbated worries about China’s weakening economy and whether Chinese policymakers can respond effectively.
Thursday’s trading day was the shortest ever in China. And just as after Monday’s trading day was curtailed following another 7% drop, the sell-off spread around the world.
In U.S. markets, the Dow Jones industrial average tumbled 392.41 points, or 2.3%, to 16,514.10 on Thursday as stocks such as Apple Inc. and Chevron Corp. suffered losses of 3% or more.
The broader Standard & Poor’s 500 index fell 2.4% and the Nasdaq composite index, which is heavy with technology shares, skidded 3% and has lost 6.4% just this week.
At the same time, U.S. crude oil dropped to $33.27 a barrel, its lowest price in 12 years, amid fears that China’s problems will reduce oil demand.
Late Thursday, the China Securities Regulatory Commission announced it was indefinitely “suspending” the circuit-breaker rules that automatically shut down trading for the day when there’s a 7% decline in shares on the Shanghai composite index.
The regulator said that although
the circuit breaker was not the “main cause” of the crash, it had had a certain “magnet effect,” pulling the market down as the index approached the trigger level. A spokesman for the commission said that the effect of the circuit breaker “didn’t meet our expectations” and that China needed to “explore, experience and dynamically adjust” its regulations.
Although the move may satisfy critics of the circuitbreaker system, which came into use at the start of the new year, it seemed likely to provide further ammunition to those who already regarded policymaking as hasty and haphazard.
China’s securities regulator defended the circuitbreaker mechanism after Monday’s halt, saying it “calmed down investors and played a positive role in protecting their rights,” the official New China News Agency reported. The market needs time to gradually adapt to it, the regulator said.
But Kamel Mellahi of the Warwick Business School in England said that authorities were probably unhappy with two circuit-breaker triggers in one week. “It is sending a bad signal and driving the wrong kind of behavior,” he said. “It looks like it’s generating more panic.”
A move Thursday by China’s central bank to weaken the currency, known as the renminbi or the yuan, by half a percentage point was among the factors weighing down investor sentiment and raising questions about how closely Chinese regulators were coordinating their moves. Adding to concerns were fears that temporary measures that have prevented large Chinese shareholders from selling big stakes were about to expire.
“Obviously it’s been a disco week already … and then comes this inexplicable — to me — move to weaken the currency,” said Fraser Howie, coauthor of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “That’s the biggest [price] fixing move down since August. So everyone decides to head for the doors.”
Mellahi called the move to weaken the renminbi “a very risky one indeed.”
“Using currency depreciation to stimulate growth is a double-edged sword. A weaker yuan will help boost the country’s sagging exports and help economic growth, but it will also increase the risk of capital flight out of China, making investment in the stock market less attractive, and increase the cost of imports,” said Mellahi, a professor of strategic management who studies the Chinese market.
Howie said that the timing of the currency move “during one of the most volatile stock market weeks for a long time, just seems to show there is zero coordination between the different regulators, the different bodies.”
The market plunges have given investors unwelcome flashbacks to summer, when Chinese stocks, riding high on a year of tremendous growth, suddenly began to plummet. By August, despite intense government intervention, China’s major indexes had shed about 40% of their value, wiping trillions of dollars from global markets. New data Thursday showed China’s foreign exchange reserves fell by more half a trillion dollars in 2015, to $3.3 trillion, amid an outflow of capital.
After Monday’s stock market slide, Chinese authorities took steps to support prices, ordering statecontrolled funds to buy equities, Bloomberg News reported.
On Thursday, China’s securities regulator announced new rules limiting how large shareholders may sell their holdings. Under the measures, which take effect Saturday and replace temporary rules that expire Friday, large shareholders (those who hold 5% or more of a company’s shares) cannot sell more than 1% of the company’s total shares on the open market in a threemonth period.
Data released last weekend showed a fifth straight month of contraction in China’s manufacturing sector, reviving fears that a protracted slowdown in the world’s second-largest economy could be worse than expected. In another worrisome sign Thursday, the Caixin purchasing managers’ index, an economic indicator that covers manufacturing and services, fell to 49.4 last month from 50.5 in November. A score below 50 indicates contraction.
But not everyone was seeing doom and gloom. In a research note on China stocks titled “Bad start doesn’t mean bad end to 2016,” HSBC analysts said that government intervention was providing stability and that they expected the surge in volatility to be temporary. The bank’s analysts added that leverage had come down from last summer and that liquidity and sentiment had “largely normalized.”
Analysts for Standard Chartered also saw some silver lining. “We think this week’s market slump reflects a correction in the absence of supportive policies, not a worsening of growth momentum,” they said in a research note. “In fact, data has improved since November, and the economy appears to have stabilized.... Among the forward-looking indicators, those related to investment and property market are improving.”
The market volatility and currency weakening has some prospective investors sitting things out for now.
Zhang Fengli, a 22-yearold kindergarten teacher in Shenzhen, said she was interested in getting into the market and had scraped together about $3,000 by December. But a cousin who lost money in last summer’s plunge warned her off.
“He said the situation isn’t good, and there might be another crash, and a newbie like me shouldn’t risk it,” Zhang said. After reading more about the market, she said, “the more scared I became. I’m still inexperienced, so I don’t think I can be luckier than so many experienced investors.
“Now I’m happy I didn’t invest.”
julie.makinen@latimes.com Yingzhi Yang and Alexandra Li in The Times’ Beijing bureau and staff writer James F. Peltz in Los Angeles contributed to this report.