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Business News/ Market / Stock-market-news/  What’s the trouble with the Chinese market?
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What’s the trouble with the Chinese market?

The Shanghai Composite Index fell 8.5%, to 3,725.56 points, with the losses coming mostly during a hectic last two hours of trading on Monday

Despite the government’s pledge to continue propping up the stock market, analysts warned those measures were not succeeding in boosting confidence. Photo: AFP Premium
Despite the government’s pledge to continue propping up the stock market, analysts warned those measures were not succeeding in boosting confidence. Photo: AFP

New Delhi: Chinese shares suffered their biggest one-day percentage drop in over eight years Monday, wiping out hundreds of billions of dollars of market value and putting an end to a three-week period of stability Beijing had achieved by intervening with stock purchases and other steps to stop the slide.

The Shanghai Composite Index, which includes China’s biggest companies, fell 8.5%, to 3,725.56 points, with the losses coming mostly during a hectic last two hours of trading on Monday. Read more

Despite the government’s pledge to continue propping up the stock market, analysts warned those measures were not succeeding in boosting confidence.

Rajiv Biswas, chief Asia economist for IHS Global Insight, said: “Some sort of correction had to happen and is happening and there is probably not a lot they can do to prevent a significant further drop. Even if they do announce monetary stimulus and fiscal stimulus measures, it is going to take some time before those really have any impact on the economy." Read more

China’s market capitalization is down some $3.3 trillion from last month’s peak, including a $613 billion decline on Monday, according to an index compiled by Bloomberg tracking companies with primary listings on the mainland. A five-fold surge in margin debt over the 12 months through 12 June had helped propel the Shanghai index to a more than 150% gain.

Meanwhile, Asian stocks started Tuesday under a cloud with markets waiting nervously to see how Chinese shares fare later in the session after Monday’s slump all but erased risk appetite. The dollar was under pressure as China jitters spurred flows into havens such as the yen, while commodities including oil and copper wilted amid fears of a collapse in demand from China.

When the Chinese stock market crashed in early July, the Chinese government took drastic steps to prevent further stock market declines. But while these measures appear to have accomplished the government’s short-term objective of halting a politically embarrassing slide in stock prices, the government now faces a problem that could prove more serious in the long run: The Chinese government’s reputation is now even more tied to the stock market’s fortunes, and the government will face pressure to intervene further every time prices decline.

“Normally we would say that the Chinese stock market is not that connected to its real economy, as firms don’t use it to raise that much money, and it’s a small percentage of household wealth," said David Dollar, a senior fellow at the Brookings Institution’s Thornton China Center. “By coming in with all these measures, the central authorities on the one hand seemed a little panicky ... and the real worry is that this undermines Chinese people’s confidence in the real economy and the government’s ability to make policy."

“The idea that the government will support asset prices or prevent losses or prevent negative outcomes is not unique to the stock market ... it is pervasive" in the Chinese economy, said Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management.

Still, for now, the vast majority of China’s small, retail investors are fine after Monday’s carnage. “For a lot of people, it was paper gains and paper losses," Chovanec said. Read more

As with any sudden sell-off, the reasons given by analysts were varied and more akin to guesses than solid explanations. Many pointed to a call by the International Monetary Fund, reported by Bloomberg, for the government to wind down its extraordinary measures to prop up the market. Some said regulators had quietly resumed a crackdown on unofficial margin lending used to buy shares. Others pointed to a drop in industrial profits in newly published data, a reminder of China’s ongoing economic slowdown; to fast-rising pork prices, which threaten to push up Chinese inflation and lead to tighter monetary policy; as well as the likelihood that the Federal Reserve will soon raise interest rates, luring investment capital away from China and into America.

The lesson from the stock-market instability is that continued economic growth will depend on continued economic restructuring, but growth will be compromised by endless bureaucratic interventions. A retreat from economic reform is the prime obstacle to continued Chinese progress.

Here’s the China story in five charts.

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Published: 28 Jul 2015, 11:36 AM IST
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