World could face months of market aftershocks

BEIJING -- The latest trigger was currency jitters, but Thursday's plunge in Chinese stocks was just one in a series of aftershocks from last year's boom and bust that could shake markets for months to come.

See Full Article

Investor anxiety over economic weakness and a possible glut of unwanted shares flooding the market have complicated Beijing's efforts to withdraw emergency controls imposed after Chinese stock prices collapsed in June.

On Thursday, trading halted for the day after a stock index fell 7 per cent a half-hour into the trading day. It was this week's second daylong suspension after a plunge in prices Monday tripped the same "circuit breakers" that were introduced Jan. 1.

The benchmark Shanghai Composite Index more than doubled between late 2014 and June, then dived 30 per cent. Supported by a multibillion-dollar government intervention, the market rose almost 25 per cent in the final months of 2015, only to collapse in the new year. That left the main index down 15 per cent from its December peak.

Wild price swings could continue through the first half of this year, according to financial analysts. Even after the latest declines, the Shanghai index is up 36 per cent from October 2014.

The turmoil in China triggered a sell-off in Asian and Western stocks. Beijing keeps its markets sealed off from global capital flows, but due to the vast size of China's economy, foreign investors watch them closely and react to volatility.

"The market still is trying to find a bottom, and that takes time," said Chen Yong, a strategist at Lianxun Securities. "The key is to be able to resume normal daily trading, and during that time volatility is inevitable."

The upheaval disrupted the ruling Communist Party's plans to use the stock markets as a tool to make China's state-dominated economy more competitive and productive.

Economic growth fell to a six-year low of 6.9 per cent in the July-September quarter and is forecast by the International Monetary Fund to decline further to 6.3 per cent this year. Monday's stock price plunged was triggered by surveys that showed manufacturing in December was weaker than expected.

The latest bout of selling was fueled by concern Beijing is letting China's yuan weaken too fast against the dollar.

The yuan, also known as the renminbi, has drifted down by 6 per cent against the U.S. currency since the central bank adopted a mechanism in August it said would make the state-set exchange rate more market-oriented.

The yuan's link to the dollar meant it soared as the U.S. currency climbed over the past year, making it overvalued by 10 to 15 per cent against those of other developing countries. But the prospect Beijing would close such a large gap fueled fears it might lead to an outflow of capital, weakening China's economy and reducing the supply of money to support share prices.

Thursday's exchange rate of 6.5646 yuan to the dollar was the lowest since March 2011.

"The government hopes to see the yuan depreciate to stimulate exports and the economy, but the speed of depreciation went too fast," said analyst Zhang Gang of Central China Securities.

The White House said the U.S. was closely monitoring China's currency. White House spokesman Josh Earnest said the U.S. approach to the uncertainty was to continue pressing China to speed up the pace of economic reforms he said would benefit China long-term and help the global economy.

Investors also were skittish about the impending end Thursday of a six-month ban on share sales by any stockholder who owns more than 5 per cent of a company, according to Zhang.

Regulators tried to head off such concern by announcing earlier in the week major shareholders could sell only in private transactions to avoid flooding the market. After Thursday's market plunge, the securities agency tightened that restriction by saying they can unload only the equivalent of 1 per cent of a company's shares over the next three months.

"Additional volatility in China's stock market remains almost certain in the first half of 2016," said economist Brian Jackson of IHS Global Insight in a report. "China's stock market reform will remain a messy affair."

Chinese leaders encouraged novice investors to pile into stocks beginning in late 2014. They wanted to raise money for state companies to pay down heavy debt loads and become profit-oriented and competitive. Communist planners also hoped investing would help families save for retirement, easing the pressure on Beijing to pay for pensions and health care.

Those plans went wrong when markets soared faster than Beijing wanted. By May, state media that cheered on higher prices started to mix in appeals for investors to act prudently.

After prices plunged in June, the government banned sales by big shareholders, ordered state companies to buy stock, cut interest rates and cancelled initial public offerings.

The government has yet to say what its intervention cost, but Goldman Sachs has estimated state entities spent 860 billion-900 billion yuan ($135 billion-$140 billion) to buy shares in June and July.

The "circuit breakers" might be adding to volatility instead of dampening it as similar measures do in Japan, Thailand and other Asian markets, economists said. They said the 5 per cent gain or loss in the CSI 300 index that triggers a 15-minute trading suspension and the 7 per cent margin that ends trading for the day might be too low a threshold.

According to IHS, the mechanism would have been tripped 20 times if it had been in place in the final quarter of 2015.

"It's hard to see how the circuit breakers can remain in their current form," said Bernard Aw, a market strategist at investment company IG in Singapore.



Advertisements

Latest Economic News

  • Guide to 'fake news' wins $30,000 National Business Book Award

    Economic CTV News
    TORONTO -- A timely guide to distinguishing fact from fiction in the era of "fake news" was announced Monday as the winner of the $30,000 National Business Book Award. Neuroscientist Daniel J. Levitin said he was prompted to write "A Field Guide to Lies: Critical Thinking in the Information Age" (Allen Lane Canada) as a response to the "Balkanization of the news over the last 15 years. Source
  • Montreal couple hid winning $55M lottery ticket in daughter's toy box

    Economic CTV News
    MONTREAL -- A Montreal couple who won $55 million in a lottery jackpot hid the winning ticket in their daughter's toy box over the weekend. Nathalie Langlais and Gilles Rosnen picked up their winnings at Loto-Quebec headquarters in Montreal on Monday, three days after the Lotto Max draw. Source
  • Capital markets not a place for 2nd chances, OSC lawyers tell Drabinsky hearing

    Economic CBC News
    Lawyers for Ontario's securities regulator said today in their closing statements that Garth Drabinsky, who defrauded investors of an estimated $500 million, should not be allowed to participate in the capital markets. Pamela Foy, senior litigation counsel with the Ontario Securities Commission, says the capital markets are not the place for second chances and the commission cannot allow Drabinsky to be in a position where he could do more damage. Source
  • Luxury shoe brand Jimmy Choo goes up for sale

    Economic CTV News
    LONDON -- Shares in Jimmy Choo have leapt 11 per cent after its board put the luxury shoe brand up for sale. The gains bring the market value of the firm that began in east London to over 700 million pounds ($896 million). Source
  • Hertz and Thrifty to pay $1.25M fine following probe into their advertising

    Economic CTV News
    OTTAWA - Car rental companies Hertz Canada Ltd. and Dollar Thrifty Automotive Group Canada Inc. have agreed to pay a total of $1.25 million in penalties following an investigation into their advertising by the federal Competition Bureau. Source
  • U.S. Supreme Court rejects GM appeal to block ignition switch lawsuits

    Economic CBC News
    The United States Supreme Court has turned away an appeal from General Motors Co. seeking to block dozens of lawsuits over faulty ignition switches that could expose the company to billions of dollars in additional claims. Source
  • Qatar Airways sees 'manageable' decline in flights to U.S.

    Economic CTV News
    DUBAI, United Arab Emirates -- The CEO of one of the Middle East's largest carriers said Monday passenger numbers to the United States have dipped slightly over fears by some Muslim passengers that their visas may be rejected upon arrival, but expressed confidence in President Donald Trump as a "very good businessman. Source
  • Extra EI help to hard-hit regions tops $1 billion, surpassing budget estimates

    Economic CTV News
    OTTAWA -- The federal government says it has paid out more than $1 billion in extra employment insurance benefits to out-of-work Canadians in the hardest-hit economic regions of the country, blowing past what the Liberals estimated the program would cost. Source
  • Home Capital says founder Gerald Soloway to leave board, CFO to change role

    Economic CBC News
    Home Capital Group Inc. said Monday that two people named in an Ontario Securities Commission action against the company will be moving out of their roles. The embattled mortgage lender said chief financial officer Robert Morton will shift out of that role after the company files its first-quarter results. Source
  • Notley says Canada will have lots of allies if Trump goes after energy trade

    Economic CTV News
    GUANGZHOU, China -- Alberta Premier Rachel Notley says U.S. President Donald Trump is likely to have some unhappy supporters south of the border if he goes after Canadian energy with trade sanctions. Notley, who is on a trade mission in China, says she doesn't know what Trump was talking about last week when he lumped energy in with other trade irritants, including softwood lumber and dairy. Source