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Chinese stock market fall sends worldwide ripples

by William Baunton

Wed 8 Jul 2015

Chinese stock market fall sends worldwide ripples Enlarge Chart loading Image

What the chart shows: Hong Kong’s Hang Seng index, 2 Jan to 7 July 2015.

Why it is important: As covered in Chart of the week on 2 July, the margin trading-fuelled Chinese stock market bubble has firmly entered bear market territory, plunging virtually continuously for nearly a month. The contagion is spreading, spilling over into other markets. While most eyes have focused on the Greek debt crisis, $3tn has been wiped off the value of Chinese stocks since 12 June, roughly 10 times the value of Greek government debt. Greece has been given to the end of the week to avert an exit from the euro. Depending on what happens in Athens, China may take over as the financial markets’ chief area of concern.

On Wednesday the Shanghai Composite index fell 6%, closing at 3,507, with a further 500 listed companies halting trading in their shares. The total is now at nearly 1,500, more than 40% of the market. The tactic of freezing trading of in certain shares, aimed at stopping prices plummeting, is exacerbating the problem, with investors focusing their selling on any stocks left trading. The shares that are frozen will almost certainly fall significantly when trading resumes, whenever that may be.

Even the tip-lipped China Securities Regulatory Commission warned of ‘panic sentiment’. The regulator continued its efforts to stop the rout on Wednesday, banning major shareholders and company directors from selling their shares in listed companies for six months.

The 30% decline in share prices in mainland China, and the government’s shortcomings in maintaining control, are spreading fear through world markets, most markedly in Hong Kong.

With suspended trading and a shortage of buyers, liquidity is drying up on the mainland and investors are moving to cash out the Hong Kong market. Mainland investors on the Hong Kong Shanghai Stock Connect, or ‘southbound trading’, have been net sellers for over a week now. The gains made on the Hang Seng index since January have been wiped off in a matter of days, with the index registering a one day record fall on Wednesday. 49 out of the 50 constituents of the index declined on the day, resulting in a 6% fall in the index, which closed at 23,516, 3% down since the start of the year.

Commodity prices are being pushed down by Chinese equities decline, with nickel, zinc and iron trading at their lowest levels since the financial crisis. Commodities are already under pressure with a general supply glut and a strengthening dollar. Chinese investors are rushing to exit commodity positions to raise cash. China’s economic slowdown has led to expectations of declining commodities demand and a bulking up of traders’ short positions. Depending on what happens to Greece, the Chinese stock market collapse has plenty of potential for sparking further unruly movements around the world.