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Rattled Investors Tank Chinese Markets

Beijing’s month-long effort to stabilize China’s stock markets were dealt a blow today as investors mounted a broad sell-off. It’s not pretty, as Reuters reports:

Major indexes suffered their largest one-day drop since 2007, shattering three weeks of relative calm in China’s volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that started in mid-June. […]

The CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen tumbled 8.6 percent to 3,818.73 points, while the Shanghai Composite Index .SSEC lost 8.5 percent to 3,725.56 points. […]

“The lesson from China’s last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect,” wrote Capital Economics analysts in a research note reacting to the slide.

More than 1,500 stocks fell by the maximum daily amount of 10 percent, while only 77 rose. In Europe and to a lesser extent the U.S., markets also dropped, likely due to contagion from the Chinese mess. China’s stock markets had regained more than 15 percent since of their value since the government started its aggressive interventions earlier this month, but the new sell-off now seems to be reversing that bounce-back.

There appeared to be no single bit of news that would have explained the scale of today’s sell-off. Investors in China’s stock markets were reacting like “birds startled by the sound of a plucked bowstring”, one analyst told the FT. “The huge drop shows that the market is really sensitive now…I think it’s panic behaviour. People’s confidence has been shaken.”

We warned that further trouble could be coming for the Chinese economy last week, when it came out that a quarter trillion dollars of private Chinese wealth had fled the country’s markets in Q2. WRM has written at the length about some of the reasons why China’s economy is in such danger. There’s no crystal ball for timing the country’s markets, but when the Big One for China—the crash that ends the miracle—comes, its early stages will look like what we see now, as China’s government tries and tries, but ultimately fails, to keep the economy up and running.

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  • Anthony

    Another view: “…it appears that the scale of capital outflows, legitimate or illegitimate, do not present a real threat to financial stability. What is more, some volatility in the capital account can help Chinese officials to prepare the economy for greater shocks given further capital account liberalization….” See: thediplomat.com/2015/07/chinas-capital-deficit-not-to-worry/

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