World stocks sank on Monday after an 8.5 per cent plunge in Chinese shares, its worst day since February 2007. Official Chinese news agency, calls today “Black Monday.”
Wall Street Journel Reports:
Chinese stocks suffered their worst single-day loss in more than eight years, shining an unwelcome spotlight on the country’s financial condition at a time when its leaders are putting on two big events meant to showcase China’s global standing.
Chinese government media dubbed it “Black Monday,” a surprisingly bleak description to come from the People’s Daily, which normally tries to cushion bad news. The Shanghai Composite Index’s 8.5% loss was its biggest percentage decline since February 2007, leaving the market down 0.8% for the year and down 38% from its mid-June peak. At that point stocks were up 60% for the year, having doubled over the preceding 12 months.
Coming on top of a global downturn Friday, it spurred more selling in Europe and Asia.
“Compared with the selloff in June and July, when investors still harbored hope of government rescue measures, this time investors are completely despairing because the previous government stabilization measure have failed,” says Amy Lin, analyst at Capital Securities.
Driving the selloff is the concern that the once-highflying Chinese economy may be slowing dramatically, which has triggered steep losses in global stock markets, commodities and emerging markets. China’s surprise devaluation two weeks ago—which could make its exports more competitive—and a string of weak data signal the economy may be feebler than expected, despite a campaign to rev up growth that has included interest-rate cuts and measures to boost lending.
The smaller Shenzhen market fell 7.7% to 1882.46, putting it down 40% from its June peak. Both indexes have now breached bottoms hit in early July, when the government had already intervened massively to stem selling.
Mark Lu, 30, said after the government started buying stocks to boost the market, he followed suit. “I have never thought of the plunge,” he said. “It totally ran counter to the government’s intention.”
Mr. Lu said he’s planning to load up on more stocks, as he believes the market is nearing the bottom. “I know it sounds like a gamble,” he said. “But sometimes the Chinese market is indeed a casino.”
The decline comes at an embarrassing time for China’s leaders. The government has already shut down parts of central Beijing in preparation for a Sept. 3 parade that will feature about 12,000 troops and nearly 200 aircraft. Marking the 70th anniversary of the end of World War II, it is meant to highlights how far the country has come since then.
The other big event, the world track and field championships, serves as a reminder of better days in China: Held in the Birds Nest stadium built for the 2008 Olympics, it marks a time when the country was coming off three years of nearly 13% annual growth.
Shanghai’s performance is increasingly a factor for investors in global markets, even though China’s mainland market isn’t yet fully accessible to foreigners. “A devaluation in the yuan [however small] and a stock-market crash speaks the language of global investors. It says, there’s a problem here,” says Mr. Nicholson.
Stock markets across the region—from Japan to Australia—slid more than 4% and a number of regional currencies fell to fresh multiyear lows.
Traders are looking to China’s next easing move after The Wall Street Journal reported that the central bank is preparing to flood the banking system with liquidity to increase lending.
One measure analysts are expecting is a cut to banks’ reserve-ratio requirements, the third in an easing cycle that began last November. “That’s the sort of movement the government really needs to announce to provide some positive sentiment for the market,” says Mr. Nicholson.
Some 2,153 stocks trading in Shanghai and Shenzhen fell by the 10% daily allowed by regulators, according to Wind Information Co. That effectively means that at least two thirds of mainland shares were effectively untradeable—bargain hunters have wait until at least the next trading day.
Among the hardest-hit stocks in China were brokerages. Citic Securities Co., one of China’s biggest, was limit down Monday and has fallen more than 50% year to date.
The global stock rout hit India, which had been one of the best-performing emerging markets in the world. India’s S&P BSE Sensex was down 5.9%, its largest one-day percentage drop since January 2009. For the year, the benchmark is down 6.4%, at 25741.56—its lowest point in 13 months.
Hong Kong’s Hang Seng Index, which last week slipped bear-market territory—defined as a drop of more than 20% from a recent high—slid a further 5.1% to 21251.57. A benchmark of Hong Kong-listed Chinese companies fell below 10000 for the first time in more than a year, finishing off 5.8% at 9602.29.
Hong Kong Financial Secretary John Tsang held a news conference in a bid to calm down jitters. “Hong Kong’s financial market is still operating in an orderly manner and in a smooth fashion,” he said, adding that there is no substantial fund outflows from the city.
Japan’s Nikkei Stock Average was down 4.6%, Australia’s S&P ASX 200 was off 4.1% and South Korea’s Kospi was down 2.5%. Taiwan’s Taiex, Asia’s worst performing stock index year-to-date—down 20%—fell 4.8%.
In currencies, losses accelerated as nervous investors pulled out cash. The Malaysian ringgit led the way, falling to a fresh 17-year low, while the Thai baht fell to a six-year low and the South Korean won to a four-year low, all against the U.S. dollar. Indonesia’s rupiah weakened to a fresh multiyear low, while the Philippine peso fell to its weakest in almost five years.
“The global tone towards emerging markets is getting worse and [investors’] risk aversion is broadening,” said Rajeev DeMello, head of Asian fixed income in Singapore at Schroders, which has $487.4 billion under management.
The ringgit spiraled weaker after Swiss authorities opened a criminal probe into the relationship between “suspicious transactions” in the country’s banking sector and state investment fund 1Malaysia Development Bhd. The currency was last down 1.5% against the dollar and is down 21% for the year.
Asian bond prices fell relatively modestly, with heavier selling in high-yield corporate debt, including that of Chinese property businesses and Indonesian companies. But if the rout continues investors could start turning to their more-liquid assets to cover losses or meet margin calls—when brokerages ask borrowers to add more money to their trading accounts or to unwind their bets if the market has fallen below certain thresholds.
“If the stock rout continues, that will create a systemic selloff as investors will need to raise cash to cover margin calls amid equity falls,” said Ben Sy, Asia head of fixed income at J.P. Morgan Private Bank in Hong Kong. “Fixed income is the only area for them to raise cash.”
U.S. oil prices tumbled, with crude futures for West Texas Intermediate falling 2.8% to $39.33, after falling below the $40 mark Friday for the first time since 2009. Brent, the international benchmark, fell 2.4% to $44.35. It is down 23% year to date.
Gold is flat at $1,159.80 a troy ounce in Asia, after hitting seven-week highs last week.