China’s chilly dip puts the shivers on global stock market

Less than half an hour after the market opened, Chinese stock trading was suspended for a second time this week and China shares fell by 7 %, triggering the circuit breaker mechanism which arrests panic selling by share holders. 

The domino effect was felt across top European markets which fell by 3 %. Experts say the lowering of yuan to 6.5646 against the dollar, the lowest since 2011 is a cause for concern. Brent crude prices skidded over 5 percent to an almost-12-year-low of $32.16,  with worries over weaker demand from China adding to a persistent drag on prices caused by oversupply and near-record output levels. 

“It’s looking pretty ugly,” said hedge fund manager and chief investment officer Andreas Clenow at ACIES Asset Management in Zurich. “We’ve been scaling down equity positions. It’s time to take a step back to re-evaluate the situation.” 

Other regional currencies followed the yuan down as markets began to worry about competitive currency devaluations from trading partners. Singapore’s dollar hit a six-year low, the South Korean won touched a four-month low, and the Malaysian ringgit slumped to a threemonth trough. 

Investors fear China’s economy is even weaker than had been imagined, with Beijing, in a bid to help exporters, allowing the yuan’s depreciation to accelerate. “The lower yuan fixing probably signifies greater risks to the Chinese economy than we know of, leading to risk-off trades,” said Jeremy Stretch, head of currency strategy at CIBC World Markets. 

Nuking risks 

North Korea’s announcement on Wednesday that it had successfully conducted a test of a hydrogen nuclear device added to a growing list of geopolitical worries for investors. “Geopolitical tensions stemming from Saudi-Iran tensions and North Korea’s nuclear test had already heightened the ‘risk off’ mood,” said Takashi Hiroki, chief strategist at Monex Securities in Tokyo. “Resurfacing China risk was the extra psychological blow to the markets that led to the selloff in equities.” 

New rules Chinese authorities introduced this week that restrict selling by large shareholders did not go down well with investors and provided little tonic to jittery markets. “This is crazy. Chinese regulators set off on this path in July and they cannot get out of it. They have ruined whatever hope investors still had in the market,” said Alberto Forchielli, founder of Mandarin Capital Partners in Hong Kong.