China’s stock market was off to a poor start in the new year as the Shanghai Composite Index plunged by 7%. The CSI 300 Index – a benchmark for the largest 300 listed stocks in Shanghai and Shenzhen – also declined by 7%. The steep decline compelled authorities to trigger the recently implemented stock market circuit breaker to halt trading in order to curb panic selling by investors. This marks the biggest ever decline on the first trading day of the year.
Hao Hang, managing director at Bank of Communications Co., said, “The circuit breaker system actually creates a downward spiral [and it] is actually making the selling worse.” China’s new circuit-breaker mechanism will trigger trading suspension for the rest of the day after a drop of around 7% from the previous closing price.
China’s Manufacturing Activity Slowing Down
According to Caixin Media Co., the country’s purchasing managers index fell from 48.6 in November to 48.2 in December, which marks its tenth consecutive month of below-50 reading. A below-50 reading implies contraction in factory activity. The two factors weighing down manufacturing activity in China are overcapacity and weak demand. Manufacturing activity continues to dwindle despite slew of stimulus packages rolled out by the central bank and China's government in 2015.
Xia Le, Research economist at BBVA, said, “We haven't seen any material improvement in economic momentum.” Xia added, “Small and medium-sized companies are under growing pressure. Toward the end of the year, some decided to close down because they're not making any money.” Caixin also stated that many companies are facing a slowdown in new orders and export orders. They are being forced to cut back costs by laying off employees and buying less raw material.
While investment and manufacturing output has been declining in China, the only thing to cheer about is rising consumption levels. However, some analysts believe that this still does not mitigate the threat of a Chinese recession. Jianguang Shen, economist at Mizuho Securities Asia, said, “I don't think we can call this a soft recovery yet – just that growth is decelerating at a slower pace.” He added, “The problem is on transmission. Money is not flowing into the real economy.”
According to Caixin Media Co., the country’s purchasing managers index fell from 48.6 in November to 48.2 in December, which marks its tenth consecutive month of below-50 reading. A below-50 reading implies contraction in factory activity. The two factors weighing down manufacturing activity in China are overcapacity and weak demand. Manufacturing activity continues to dwindle despite slew of stimulus packages rolled out by the central bank and China's government in 2015.
Xia Le, Research economist at BBVA, said, “We haven't seen any material improvement in economic momentum.” Xia added, “Small and medium-sized companies are under growing pressure. Toward the end of the year, some decided to close down because they're not making any money.” Caixin also stated that many companies are facing a slowdown in new orders and export orders. They are being forced to cut back costs by laying off employees and buying less raw material.
While investment and manufacturing output has been declining in China, the only thing to cheer about is rising consumption levels. However, some analysts believe that this still does not mitigate the threat of a Chinese recession. Jianguang Shen, economist at Mizuho Securities Asia, said, “I don't think we can call this a soft recovery yet – just that growth is decelerating at a slower pace.” He added, “The problem is on transmission. Money is not flowing into the real economy.”
Falling Yuan
Another factor driving the massive sell-off on the first trading day of the year was the declining yuan. On Monday, China’s Central Bank set the daily fixed rate of the yuan at 6.5140 per dollar, marking its lowest level since 2011. Many analysts believe that the yuan will continue to slide and will drag down other Asian currencies.
The Bottom Line
China’s stock market rout on the first trading day of the year triggered slides in other markets around the world. The primary factors contributing to the slump were weak manufacturing data and a falling yuan. Another factor that might continue to exert pressure on China’s stock market will be an imminent lifting of a ban of the sale of stock of major shareholders, which was imposed after the stock market rout in August.
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