For the second time in four days, the Chinese stock market has closed early as a result of a 7 percent decline. Within the first 12 minutes of the trading day, the CSI 300, an index of 300 stocks that are traded on the Shanghai composite index and the Shenzhen composite index, was down 5 percent, which triggered a 15-minute stoppage in trading. Shortly after the stoppage, stocks plunged another 2 percent and trading was suspended for the day – a result of a mechanism put in place after this past summer’s stock market plunge to ward off volatility.
The nosedive on Monday and the subsequent halt in trading was attributed in part to the fact that restrictions on major shareholders (owning 5 percent of a company’s stock or more) and executives of Chinese companies selling stock were set to expire on Jan. 8. In response to Monday’s decline, the China Securities Regulatory Commission verbally informed the markets that the restrictions on trading would remain in effect for an unspecified amount of time past Jan. 8. So that means that even in spite of the fact that China is preventing these major players from liquidating their positions in the market, investors are pulling their money out.
The drop in the stock market also comes a day after the People’s Bank of China pumped $20 billion into the country’s financial system to prop up the market. The combined effect of extending the ban on trading and the PBOC’s unplanned attempt to throw cash at the problem appeared to at least temporarily halt the downward spiral, as the Shanghai Composite closed down just 0.26 percent on Jan 5.
The first thing we can say then is that these measures failed to staunch the bleeding.
Fingers today will be pointed at the fact that the PBOC started the day off by decreasing the yuan’s value against the dollar by 0.51 percent, the largest downward adjustment since Aug. 13. On Jan. 5, the yuan dropped to a five-year low in offshore trading and the offshore exchange rate against the dollar was at a 2.1 percent discount when compared to the rate on the mainland. This no doubt exacerbated an already volatile situation, but the decline in the Chinese stock market is not a result of any one single economic factor or government decision. The fear of increased supply penetrated the Chinese markets on Jan. 4 and thus far China’s moves to try and stabilize investor confidence in the situation have failed.
Today indicates that what might have been explained away as a one-day blip is beginning to look more like a rout, one that is being kept at bay solely by China’s intervention into the markets. This summer’s stock market plunge resulted in a loss of $5 trillion and spread panic to markets throughout the entire world, despite the fact that the Chinese stock market itself is relatively insular and there is little exposure to it for foreign investors. Most of those losing money on the markets are Chinese – either the citizens or the state itself – and the stock market does not play the same role in China as it does in the West.
That said, as we stated on Jan. 5, these precipitous declines have important political consequences. They are a telling sign that there is a lack of confidence both in the economy itself and in the state’s regulatory regime. The decline is happening as the Communist Party engages in large-scale purges in the name of anti-corruption to solidify its control over the bureaucracy and the business class. It comes as President Xi Jinping is pushing forward with his attempts to reform the PLA. And it comes as China is attempting to reorient its entire economy from a high-growth, export-based model to one based increasingly on domestic consumption.
On Jan. 4, we said it was too early to call the decline in the markets a meltdown. On Jan. 7, after another 7 percent plunge and a trading stoppage, we can say that though we may not necessarily be looking at a full-scale meltdown, this is not an issue that is going away and China seems powerless to stop it except by halting trading. Political and economic repercussions will be felt throughout the world – most poignantly in a Eurasia that is already in crisis at multiple levels.