China Shares Wipe Out All Gains This Year
A number of currencies in the region fell to multiyear lows; China shares finish down 8.5%
By Chao Deng and Anjani Trivedi
Updated Aug. 24, 2015 5:28 a.m. ET
China’s stock markets suffered their sharpest daily fall since the global financial crisis on Monday, with the government withholding support at a time when investors world-wide have been rattled by volatile selling in China and a slowdown in its economy.
The Shanghai Composite Index’s loss of 8.5% by Monday’s close was its largest daily percentage decline since February 2007. Today’s performance reminded investors of an 8.5% drop on July 27, when worries mounted that authorities were pulling back on measures to prop up the market.
Monday’s performance erased Shanghai’s gains for the year, reverberated across Asia and weighed on global markets at an inopportune time for China. Next week, it will host world leaders for a memorial parade meant to show off its military power and increasing clout on the global stage. In addition, Chinese President Xi Jinping is slated to visit the U.S. next month. But a global selloff was already gathering pace by late afternoon in Asia, with European stocks and U.S. stock futures falling sharply.
At the heart of the selloff is the concern that the once-highflying Chinese economy may be slowing down dramatically, which has triggered steep losses in global stock markets, commodities and emerging markets. China’s surprise move to devalue its yuan two weeks ago—which could make its exports more competitive—and a string of weak data signal the economy may be feebler than expected, despite a campaign to rev up growth including interest rate cuts and measures to boost lending.
The Shanghai Composite closed Monday at 3209.91, bringing its losses since its mid-June peak to nearly 38%. At that point, the index had doubled in value over the preceding 12 months. The smaller Shenzhen market fell 7.7% to 1882.46, putting it down 40% from its June peak. Both indexes breached a previous bottom in early July, after the government had stepped in with massive intervention measures to stem selling.
“It will be interesting to see what happens overnight. If there aren’t major moves [from the government], we could be seeing further declines tomorrow,” said Angus Nicholson, market analyst at IG.
Shanghai’s performance is an increasing factor for investors in global markets, even though China’s mainland market isn’t fully accessible to foreigners. “A devaluation in the yuan [however small] and a stock market crash speaks the language of global investors. It says, there’s a problem here,” Mr. Nicholson said.
Asia-Pacific markets from Japan to Australia slid more than 4% and a number of regional currencies fell to fresh multiyear lows.
Traders are looking to China’s next easing move after The Wall Street Journal reported that the central bank is preparing to flood the banking system with liquidity to increase lending.
One measure analysts are expecting is a cut to banks’ reserve-ratio requirements, the third such move for China’s central bank in an easing cycle that began in November. “That’s the sort of movement the government really needs to announce to provide some positive sentiment for the market,” Mr. Nicholson said.
About 2,153 stocks trading in Shanghai and Shenzhen fell by the maximum 10% allowed by regulators, according to Wind Information Co. That effectively means that at least two thirds of mainland shares were effectively untradeable—even bargain hunters generally wait until at least the next trading the next day to buy stocks that have hit a daily down limit.
Among the hardest-hit stocks in China were brokerages, which helped spur the yearlong rally by funding stock buying on borrowed money. Citic Securities Co. , one of China’s biggest, limited down Monday and has fallen more than 50% year-to-date.
Hong Kong’s Hang Seng Index fell to 21,251.57 and slipped into bear-market territory last week. A benchmark index of mainland companies listed in Hong Kong fell below the 10000 level for the first time in more than a year, finishing down 5.8% at 9602.29.
Japan’s Nikkei Stock Average was down 4.6%, Australia’s S&P ASX 200 was off 4.1% and South Korea’s Kospi was down 2.5%. Taiwan’s Taiex, Asia’s worst performing index year-to-date—it shed 20% in that period—fell 4.8%.
In currencies, losses accelerated as nervous investors pulled out cash. The Malaysian ringgit fell to a fresh 17-year low against the U.S. dollar. The Thai baht fell to a six-year low while South Korea’s won fell to a four-year low, each against the U.S. dollar.
“The global tone towards emerging markets is getting worse and [investors’] risk aversion is broadening,” said Rajeev DeMello, head of Asian fixed income in Singapore at Schroders, which has $487.4 billion under management.
The ringgit weakened after Swiss authorities opened a criminal probe into the relationship between “suspicious transactions” in the country’s banking sector and a troubled state investment fund, 1Malaysia Development Bhd. It was last down 1.5% against the dollar but traded as low as 4.2590 during the day. The ringgit is down 21% against the U.S. dollar so far this year.
Indonesia’s rupiah weakened to as much as 14,045 against the U.S. dollar, while the Philippine peso fell to its weakest point in nearly five years.
The offshore-traded Chinese yuan fell to 6.40, down 0.1% against the U.S. dollar, while Singapore’s dollar was down 0.3%.
Asian bond prices fell modestly by comparison, with heavier selling in high-yield corporate debt, including bonds from Chinese property and Indonesian companies. But if the rout continues, investors could start turning to their more-liquid assets to cover losses or meet margin calls—when brokerages ask borrowers to add more money to their trading accounts or unwind their bets if the market has fallen below certain thresholds.
“If the stock rout continues, that will create a systemic selloff as investors will need to raise cash to cover margin calls amid equity falls,” said Ben Sy, Asia head of fixed income at J.P. Morgan Private Bank in Hong Kong. “Fixed income is the only area for them to raise cash.”
U.S. oil prices tumbled, with crude futures for West Texas Intermediate falling 2.8% to $39.33, extending losses after falling below the $40 mark for the first time since 2009. Brent, the international benchmark, fell 2.4% to $44.35. It is down 23% year to date.
Gold is flat at $1,159.80 a troy ounce in Asia, after hitting seven-week highs last week.
—Fiona Law contributed to this article.
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