CHINA’S STOCKS CONTINUE TO DECLINE DESPITE STIMULUS
August 27, 2015
We now have a good reason to believe China’s economy is facing a big problem. On Tuesday, August 25, China cut its interest rates by 0.25 percent to address slumping stocks and concerns over economic downturn. Like all previous bailout attempts, this move again failed to reverse the declining trend in stock markets.
The steepest drop in China’s stock markets since 2007 was observed on August 24 – “Black Monday” as declared by The People’s Daily, the mouthpiece of China’s Communist Party. The Shanghai Composite opened at 3,507 points and closed at 3,209, a surprisingly plunge of over 8.5 percent in a single day. In less than two months, Chinese stocks had lost over 43 percent of their value from their peak in early June.
U.S. stock markets tumbled on Monday as a result of the rout in China. Before the opening bell on Monday, the New York Stock Exchange invoked Rule 48 in anticipation of extremely high market volatility. Rule 48 is a rarely used mechanism which “speeds up the opening by suspending a requirement that stock prices be approved by stock market floor managers before trading starts.” Despite preparations, the massive volume of sell-offs triggered trading halts more than 1,200 times during the morning trading. The Dow Jones lost 1,089 points within minutes of the opening, making it the biggest plunge within a single trading day. The market slowly fought back within the next few hours and then struggled with ups and downs before closing. After losing 588.4 points, or 3.6 percent, the Dow Jones ended at 15871.35 points, the lowest in a year and half.
The nightmare in China and Asian markets continued after “Black Monday.” China’s stocks tumbled again on Tuesday, with the Shanghai Composite Index closing at 2,964.97 points after a 7.6 percent decline. In an effort to encourage borrowing and thus revitalize the market, China’s central bank, the People’s Bank of China (PBOC), announced a new round of stimulus measures Tuesday. The PBOC cut key interest rates by 0.25 percent and allowed Chinese commercial banks to hold a lower level of deposits.
While markets continued to fluctuate in China, the stimulus worked well on U.S. stock markets. On Wednesday, the Shanghai Composite Index lost 1.3 percent, closing at 2,927 points. Meanwhile, the Dow Jones closed at 16,285, with more than a 600 point or 4.2 percent gained that day. Some see this as a sign the U.S. markets are recovering from the chaos of the past few days.
The PBOC has previously made two major attempts to halt the rout in stock markets: bailout of state-owned companies in early July and devaluation of China’s currency, the renminbi, in early August. Like the recent interest rate cut, none of these efforts worked as to alter the declining trend and put the markets back on the right track. Calling the stimulus an attempt to “put out a bonfire with a watering can,” a Forbes commentator said cutting interest rates is less than enough to halt China’s economic downturn, which was caused by some deep-rooted problems such as debt burden and housing bubbles.
In China, the state-owned news media was uniformly silent on the stock chaos. The Communist Party’s mouthpiece, The People’s Daily and Xinhua, not only downplayed the rebounds in global stock markets, but also “dwelled instead on the forthcoming 70th anniversary of Japan’s defeat in World War II.” While major news outlets were reluctant to report the markets, less-circulated newspapers such as The Economic Information Daily, a subsidiary of Xinhua, urged the government to retreat from bailout policies in a front-page commentary. “Government bailouts are meant to avert financial risks, not to prop up stock prices,” it said, “although A-shares have suffered another substantial fall, we still need to stick to steadily phasing out bailout measures.”
Market analyst Evan Lucas said fear is quickly spreading across China’s stock market. “Uncertainty is creeping into markets, as well as the economies on both sides of the Pacific, with China driving the fear,” he said. In addition, a CNN commentary argued global markets are currently under the influence of three major factors: concerns over the real level of China’s economic growth, the timeline of the U.S. Federal Reserve’s interest rates hike, and the effect of other economic indicators such as crude oil prices.
Global economic slowdown and high volatility in stock market called into question whether the U.S. Federal Reserve will raise interest rates in September. Federal Reserve Bank of New York President William Dudley said the Fed needs some time to evaluate the risks on U.S. economic growth from foreign markets.
For more information on this topic, please visit the following links:
TIME – “Market fear is growing”
New York Times – “China’s Party-Run Media Is Silent on Market Mayhem”
Xinhua – “U.S. stocks plummet amid global rout”
Wall Street Journal – “Fed’s Dudley: Case for September Rate Increase Now ‘Less Compelling’”
For Chinese language news on this topic, see the sources below:
中国新闻网 – “官媒:中国股市“打喷嚏”和世界“感冒”无必然联系”
Compiled and edited by Junxiao Liang.