The new year started with a roller coaster ride for the global economy and Chinese shares.
The first trading day of 2016 started off with a bang which left the world shocked. Both major Chinese stock markets, the Shanghai and Shenzhen exchanges, halted trading in the middle of the day when the freshly installed “circuit breakers” mechanism were triggered as market declined more than 7%.
Global markets reacted accordingly. With the world’s biggest economy starting the year with a calamity of this size, the rest of the world followed suit.
One Week, Two Circuit Breakers for Chinese Shares
The 4th trading day of the year saw history repeat when the Chinese markets were suspended once again. However, this time the effects were much more significant.
The total decline of the CSI 300, a tracker for the Shanghai and Shenzhen exchanges, tallied at 12% since year-start. The rest of the world was also much more greatly affected with the Hang Seng falling by 3.1% and the Nikkei by 2.3%.
Oil prices finally succumbed to the pressure of the Chinese economy and fell to less than $33 per barrel, losing their earlier gains, further dragging down the global economy and worsening fears. This is the lowest they have been in 12 years.
Even though the political turmoil in the Middle East threatens to shorten the oil supply, the fact that China, with its unstable economy, is one of the key buyers of crude oil is enough to push the price down.
The three key reasons that led to the first trade suspension were also part of the second one. Additional factors this time included the more recent release of the growth of China’s services sector showing them at their weakest in over a year, along with the rapid devaluation of the currency.
The Chinese Yuan dropped almost 6% in value against the US Dollar since last year’s August.
Government Should Play a Passive Role, Say Experts
Another thing common to many dire times in the history of China’s economy is that its government tends to get involved in the affair.
After last year’s stock market crash, the government intervened by injecting millions of dollars into the economy, banning sales of Chinese shares from majority shareholders, and planning a circuit breaker mechanism.
This time as well, the government plans to put new rules in place aimed at helping the economy. This is despite the fact that some experts are of a different opinion. After the second suspension, it announced a new rule that will be effective immediately to greatly limit the sale of Chinese shares.
Major shareholders (those with more than 5% in any one company) are now able to sell off a maximum of 1% of their holdings in any three-month period. In addition, such investors are now required to disclose their intentions 15 days in advance. They will also be removing the circuit breaker mechanism installed just this Monday.
Many experts have spoken up against the government for being so actively involved, saying that circuit breakers only fueled more worry. Some are saying that a recession in China, caused at least in part by government intervention, is certain.
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