A major rout of Chinese stocks sparked an automatic “circuit breaker” shutdown in trading at 1:34PM today (local time), casting a pall across the world’s economy as traders pondered the uncertain new year in Europe and the United States. The CSI-300 index, which monitors the 300 biggest companies traded on the Shanghai and Shenzhen markets, was off 7 percent. Shenzhen suffered its biggest loss in nine years. Most observers blamed weak manufacturing figures out of China, but others also noted that a ban preventing large shareholders from selling their stocks, implemented in August as a measure to stabilize markets, was to be removed this upcoming Friday. And the circuit breaker itself may have played a role. Reuters:
“The slump apparently triggered intensified selling, while the trigger of the circuit breaker seems to have heightened panic, as liquidity was suddenly gone and this is something no one has experienced before. It was a stampede.” […]
“Without the circuit breaker mechanism, the market wouldn’t have dropped so much,” said David Dai, Shanghai-based investor director at Nanhai Fund Management Co
The latest numbers coming out of China bolstered the “two-track” characterization of the country’s economy, with services doing well even as industrials weakened. In the long term, that transition from manufacturing to a service-and-information economy could be good for China and the environment. But in the short term, at least, it’s likely to cause pain in China and in the world economy.
Today’s events are a reminder that nearly the entire global economy is exposed to China—weakness in Shanghai hurts bottom lines everywhere. Germany’s DAX was off 4.4 percent and the UK’s FTSE-100 was down 2.4 percent, and the S&P-500 was down 2.5 percent. Oil, which had rallied by more than 3 percent on hopes of higher prices due to instability in Saudi Arabia and Iran, saw its gains curbed on the economic news.