The vertigo-inducing declines in stock prices were chalked down as China’s Black Monday. The country’s benchmark index, the Shanghai Composite, closed down 8.5 per cent at 3,209.91 points, extending last week’s losses and defying Beijing’s latest attempts to reassure investors.
In Hong Kong, the Hang Seng China Enterprises Index of Chinese stocks fell 5.8 per cent to its lowest level since March 2014.
Combined with the recent devaluation of the yuan currency, the stock market slide adds to growing anxieties about the health of the world’s second-largest economy, and these fears spread as the dollar dropped and oil prices fell 4 per cent. The FTSE 100 fell below 6,000, while US stocks were also lower.
“We are in the midst of a full-blown growth scare,” strategists at JP Morgan Cazenove said in a research note. The euro and the yen rallied, as did US and German bonds, and fears of a currency war, present since this month’s devaluation of the Chinese currency, lingered.
Regardless of the global situation, it was a dreadful day for China’s legion of small investors. Yesterday’s decline was the worst since the global financial crisis in 2009, and it wiped out the substantial advances made since the start of the year. At one point in June, the market was up 50 per cent on the start of the year.
“What a terrible day!” said one retail investor who gave his surname as Feng – he said he was too embarrassed to give his full name. “I cannot even afford to sell off my stocks. I just have to leave the shares and hope one day I can get the capital I put in back.”
Rate cut
China’s main stock markets slumped more than 11 per cent last week and many market players were expecting the People’s Bank of China to come up with a rate cut over the weekend, but it failed to materialise.
Wang Tao at UBS said there had not been any new information in the recent weeks, apart from the recent Market PMI which again showed activity remaining weak.
However, the economy has seen new signs of weakness from disappointing exports and wobbling infrastructure investment, and Ms Wang reckons the weak stock market will likely shave up to 0.5 per cent off GDP growth in the second half.
“The government will do whatever it takes to stabilise growth at 6.5-7 per cent, with focus continuing to be on mobilising resources for and implementing infrastructure investment,” she said. “We think the People’s Bank of China still has room to cut interest rates, and can easily cut the reserve rate ratio (RRR) and/or use liquidity facilities to keep liquidity ample and short-term rates low.”
The China International Capital Corp (CICC) also predicted that the central bank will “aggressively lower RRR” by at least another 150 basis points by the end of this year.
UBS sees downward risk to its 6.8 per cent growth forecast for this year, but believes the recent recovery of property sales has reduced the risk of a hard landing in the real economy this year. UBS also said A-shares in China were still expensive.
Capital supply
Fujian Tianxin Investment Consulting said the stability of recent market improvements depended on capital supply and confidence.
The external performance of a weakening market is that stocks continue to weaken until something big happens to change people’s confidence, the company said in an online posting.
"Chinese investors still lack confidence due to the recent stock market volatility, while global investor sentiment has been dampened by China's economic slowdown and the yuan's depreciation," Yang Delong, chief strategist with China Southern Asset Management Co, told the Global Times. "There are no new adverse conditions and the market weakness is mainly due to fragile investor confidence."
Even though the rate cut failed to arrive over the weekend, there was some good news for the stock market with the news that the State Council, China’s cabinet, gave final approval to allow pension funds access to the market, which could see up to 600 billion yuan (€82 billion) channelled into the struggling equity market.
Social security
Pension funds will be able to invest up to 30 per cent of their net assets in the country’s stocks, equity funds and balanced funds, according to the finalised rules published by the State Council.
China’s pension funds, which account for about 90 per cent of the country’s social security fund pool, had net assets of 3.5 trillion yuan by the end of last year, according to the ministry.
Spokesman for the ministry Li Zhong has said that more than 2 trillion yuan (€270 billion) of the net assets can be used for investments, which means in theory that about 600 billion yuan could potentially be invested in the stock market.
Zhang Yu, an analyst with Minsheng Securities, expects the government to dig into its toolkit in the second half to stabilise economic growth.
"The financial sector that helped boost China's GDP in the first half of this year has slowed down, but infrastructure projects will play a bigger role in stabilising growth in the second half," she told the Global Times.
