Chinese stocks marked the start of the new year by getting frozen before they got absolutely obliterated due to the sharp fall in the wake of adisappointing manufacturing PMI reportfor December andfurther weakening in the Chinese yuan.
After 45 minutes of trade, the benchmark Shanghai Composite index was down 3.38%, and was down more than 4% earlier in the session. However, by the close of the trading session, China’s blue-chip stock index — the CSI 300 — fell by 7%. That’s the worst trading day in four months.
Overall, Shanghai fell by 6.86% by market close.
After 2015’s dramatic Chinese stock market volatility, where more than $5 trillion was erased from global stocks since China unexpectedly devalued its currency in August, the government installed a 15 minute circuit-breaker mechanism that triggers a trading suspension if the CSI 300 index falls by at least 5%. If after trading has resumed and stocks fall by 7%, it will halt trading for the rest of the day.
David Buik, an analyst at City broker Panmure Gordon told BBC Radio 4’s Today programme this morning that “China has been smouldering now, for some months.” He also added that while the country’s stock market doesn’t really follow economic trends, it’s worrying for the rest of the world because of the indication of growth figures.
Activity levels across small and medium sized manufacturing firms in China ended 2015 as they began — contracting.
The latest Caixin-Markit manufacturing PMI fell to 48.2 in December, below the 48.6 level of November and expectations for an increase to 49.0.
Buik also believes that China’s economic growth is a lot worse than the government is letting on. The official annual growth figure is at 7% however Buik “humbly suggests” that 3% growth is more accurate.
Meanwhile, Zhu Bin, an analyst at Southwest Securities in Shanghai told the Financial Times that “with the overall economy not showing much sign of recovery, the market just rotated through various popular themes at the end of last year, but those are now played out.”
“The circuit breaker mechanism is an artificial interruption of the market correction, and it may actually strengthen the impact of the correction.”