The new year started with a roller coaster ride for the global economy and Chinese shares. 2016’s first trading day 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 breaker” mechanism was triggered. The market declined by over 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 halted 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 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. They 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.

Political turmoil in the Middle East threatens to cut oil supply. But an unstable Chinese economy is enough to push oil prices down regardless.

The reasons leading to the first trade suspension were also part of the second one. Other factors include the more recent release of China’s service sector numbers, showing them at their weakest in over a year. The rapid devaluation of the Chinese Yuan also hasn’t helped. The 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.

Beijing intervened after last year’s stock market crash. They injected millions of dollars into the economy, banned sales of Chinese shares from majority shareholders, and planed a circuit breaker mechanism.

This time as well, the government plans new rules 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 to 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. Such investors need to disclose their intentions 15 days in advance. The circuit breaker mechanism will also be removed, even though it was installed last Monday.

Experts have spoken up against the government for being so actively involved, saying circuit breakers only fuel more worry. Some are saying that a recession in China, caused at least in part by government intervention, is certain.

InvestAsian recommends for our readers to consider investing in other countries besides China. Places like Vietnam are growing faster and have less downside risk.

 

About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's experienced with trading stocks and buying property in Thailand, Cambodia, and elsewhere. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

You Might Also Like