The Chinese stock market is crashing, unnerving markets around the world. Since reaching a 7-year high in mid-June, the large-cap Shanghai stock index (SHCOMP) has fallen over 32% and the small-cap Shenzhen index (SZCOMP) has plummeted 40% as of Wednesday’s close.
As Chinese government efforts failed to slow the slide, the rout spread to Hong Kong and beyond. By midday Wednesday, the Dow Jones industrial average, already rattled by the ongoing financial crisis in Greece and a technical trading halt at the New York Stock Exchange, was down 208 points at 17,568.
After Wednesday’s market close in China, about half the companies trading on the Shanghai and Shenzhen exchanges had voluntarily ceased trading in order to slow the rout. Over the weekend 21 Chinese brokerages, with support from the government, pledged to buy back stocks, to slow the decline, and the Chinese government announced a ban on new IPOs and pledged to provide liquidity to the state-backed China Securities Finance Corp., which lends to brokerages. All these moves followed a surprise interest rate cut in late June designed to slow the country’s stock market slide. But the decline continued, gainining momentum.
“I can’t think of anything else they can do,” Bill Witherell, chief global economist at Cumberland Advisors, said Tuesday. “They’re done more already than I could have imagined. Now they’re going to have to really hope that investors come into the market.”
But Chinese stock markets on the mainland, which trade so-called A shares that are primarily owned by everyday Chinese investors, kept falling, and the rout spread into Hong Kong. Its Hang Seng market, which had been faring much better than the mainland markets, lost almost 6%, its biggest drop since November.
On Wednesday the government announced additional measures to stop the bloodbath, including letting insurers buy more blue-chip stocks and urging major shareholders and top executives of listed companies to buy their own shares.
David Zuckerman, principal of Zuckerman Capital Management in Los Angeles, which works with many families based in Asia, says “The unsustainable rally in China stocks and the ensuing bear market underscore the reasons that we do not hold positions in stocks traded in Shanghai and Shenzhen.”
The Shanghai and Shenzhen indexes had more than doubled in price in the 12 months ended June 30, and even during the current rout they’re still up for the year. As of Wednesday’s close, the Shenzhen index is up 33% year to date, while the Shanghai index is up just 8.4%.
Two Chinese Markets