Trading
stopped after only 29 minutes and didn’t reopen, with the main index in
Shanghai down 7.3 percent. Other Asian markets slumped as well.
“Obviously
it doesn’t look good, it doesn’t look good at all,” said Hao Hong, the
chief market strategist at Bank of Communications International, the
overseas arm of a big Chinese bank.
It
has been a rocky start to the new year, with worries over China shaking
the confidence of investors around the world and creating volatility in
the market. The big fear is that China’s economy is slowing down,
crimping global growth.
A downbeat Chinese manufacturing report first sent stocks spiraling on
Monday, prompting the country’s market to close early. It also set off a
global rout, with stocks in Europe and the United States getting hit.
Since then, investors have been unnerved.
American
stocks tumbled on Wednesday, as the value of the Chinese currency sank
and another economic report showed signs of trouble. The price of crude
oil dropped more than 5 percent, with stockpiles growing and the threat
of Chinese demand slipping.
The Chinese currency, the renminbi, continued to be a sore spot on Thursday.
The
Chinese government, which closely controls the renminbi, has been
allowing its value to steadily decline. It is a difficult process to
manage, especially as companies and individuals send money out of the
country at a rapid rate.
On
Thursday morning, China’s central bank set the rate for the renminbi at
6.5646 to the dollar, its lowest point in almost six years. When stock
trading opened, investors dumped shares, once again shutting down the
market.
“People
are worried about whether they are using currency depreciation to
stimulate growth,” said Steven Sun, head of China Strategy and Hong Kong
and China equity research at HSBC. “At the end of the day the question
is, do they have control? Everyone is asking that question.”
The currency problems risk setting off a chain reaction.
As
the renminbi, also known as the yuan, keeps sliding day after day,
traders start to expect ever greater declines. The falling currency can
then fuel further stock losses in China.
That,
in turn, can ripple through to the global markets. A surprise currency
devaluation in August helped prompt a sell-off around the world.
“It’s
getting into a stage where it is self-fulfilling — the weaker the yuan
gets, the more selling there will be,” Mr. Hong said.
The renminbi will provide a critical test for the Chinese government in the coming months.
In theory, a weaker renminbi addresses two of China’s problems. It would
make China’s exports more competitive in foreign markets, offsetting
part of the surge in the country’s blue-collar wages over the past
decade. And it would make foreign companies, houses and other overseas
investments seem more expensive.
The trick is preventing a gradual decline from turning into a rout.
Managing
the currency is becoming harder for China. Mainly domestic investors
are moving money out of the country before the buying power of their
renminbi slides any further.
China’s
own economy has also been steadily slowing, making it a less attractive
place to invest. Fourth-quarter growth, which will be reported later
this month, is expected to be 6.9 percent, although some economists have
expressed skepticism about the reliability of the figures.
The clearest indication of investor sentiment about the renminbi lies in
the currency’s value in unrestricted trading here in Hong Kong. Traders
have been selling renminbi in Hong Kong for a significantly lower price
than the bottom of the government-authorized trading range in Shanghai.
The
falling value of the renminbi in Hong Kong undermines confidence in the
mainland currency. It then puts pressure on the central bank to keep
pushing down the official trading range.
Taken
together, the currency weakness, the economic slowdown and the stock
market turmoil could force the government to take action. When stocks
sold off last summer, China organized large-scale purchases by
government-linked brokerages and investment funds.
Some of those measures, though, may be adding to the current pain.
Under
a new rule, trading stops for 15 minutes when losses hit 5 percent, a
measure known as a circuit breaker. But the cooling-off period may be
intensifying the sell-off.
In
each case that the circuit breaker was activated this week, the losses
continued once trading resumed, taking stocks down 7 percent and forcing
a stop in trading both days. On Thursday, the markets closed just 29
minutes after opening, and trading was allowed for only 14 minutes.
The
CSI 300 blue-chip stock index finished down 7.2 percent on Thursday.
The Shanghai composite index fell 7.3 percent, while Shenzhen plunged
8.3 percent.
Japan’s benchmark Nikkei 225 index opened down 1.5 percent, and the Hang Seng in Hong Kong fell 2.4 percent at the start.
Erwin
Sanft, the head of China strategy at the Sydney-based Macquarie
Securities Group, predicted further declines in Chinese stocks, but he
said that the fall might not continue for long. “China is quite good at
defensive measures,” he said.
The options for the government go far beyond the market.
To
shore up the economy, China could further reduce interest rates so as
to help the real estate market. It could also further increase its
already considerable stimulus spending on infrastructure.
While
such measures might help in the short run, they would only add to one
of China’s biggest problems in the long run: a huge overhang of debt
that was used to finance poorly judged investments. Many of those
investments, like high-speed rail
lines built in smaller provincial capitals for political reasons, may
struggle to generate enough of an economic return to cover the interest
on the money that was borrowed to finance them.
“The
more you try to alleviate, the worse it gets in the long term,” said
Viktor Shvets, the head of Asian strategy at Macquarie.
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