Global markets plunge on China, Middle East fears

A man reading a newspaper at a stock brokerage house in Beijing, China, on Jan 4, 2016.
A man reading a newspaper at a stock brokerage house in Beijing, China, on Jan 4, 2016. PHOTO: EPA

Meltdown on Chinese share markets triggers mayhem; safe-haven currencies and gold gain

Share markets worldwide plunged yesterday (Monday, Jan 4) in the wake of dire economic news from China and escalating tensions in the Middle East.

The panicked sell-off in turn boosted safe-haven currencies like the United States dollar and Japanese yen, with gold also rising.

At home, the Straits Times Index (STI) also tumbled, falling alongside regional markets. The STI retreated 1.6 per cent to 2,835.97 points, while European and US stocks also slumped in early deals yesterday in a gloomy start to 2016.

The Dow fell by almost 400 points in early trading last night.

The mayhem was ignited by a meltdown on Chinese share markets that forced regulators to halt trading in stocks, futures and options on both the Shanghai and Shenzhen stock markets at 1.28pm yesterday after the blue-chip CSI 300 Index - comprising large-capitalisation firms listed on both markets - plunged 7 per cent. This was about 90 minutes before the regular close.

 

An earlier 15-minute halt at the 5 per cent level did little to stop the tumble, with losses snowballing as soon as the markets re-opened.

The savage rout, the worst start to a year for Chinese shares, came on the first day the circuit breakers, a trading halt mechanism designed to limit wild swings in one of the world's most volatile equity markets, took effect. Under the rules, a move of 5 per cent in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7 per cent closes the market for the rest of the day.

At the early close, the benchmark Shanghai Composite Index lost 6.9 per cent, while the Shenzhen Composite Index, which tracks stocks on the country's second exchange, sank 8.2 per cent. The latest plunge comes about six months after Chinese stocks suffered their worst one-day fall on Aug 24 last year. Shanghai's main share index had crashed 8.49 per cent then.

This time round, experts say the sharp sell-off follows poor data from official and private surveys of manufacturing in the world's No. 2 economy and a steep fall in the yuan exchange rate.

A survey earlier in the day showed China's factory activity shrinking for the 10th straight month in December, and at a sharper pace than November, leading to fears that a series of interest-rate cuts and fiscal stimulus have failed to spur weakening growth of Chinese manufacturers.

Moreover, measures introduced to curb the country's mid-2015 stock market crash, such as banning shareholders with holdings of more than 5 per cent in a firm from selling shares, will expire on Friday. This has led to fears of a big sell-off by major shareholders, experts said.

Yingda Securities analyst Li Daxiao told The Straits Times that these uncertainties had caused the "panic" seen in the market during its first day of trade in the new year.

"But we are likely to see the market stabilise over the next few days because this situation is unlike last summer's crash, when it was a bubble," he said.

Tensions in the Middle East also flared up after one of the largest state executions in Saudi Arabia sparked a row with Iran. Oil prices rose more than 3 per cent to US$38.40 a barrel in trading yesterday.

"Concern over the health of the Chinese economy accompanied by spiking tensions in the Middle East have combined to ensure... firm demand for safe-haven assets," Rabobank strategists said in a note.

Thesell-off rippled through regional and global equity markets, with Asian shares and US equity-index futures extending losses. Hong Kong closed on its normal schedule, but the Hang Seng Index fell 2.7 per cent. Tokyo was down 3.1 per cent.

  • Additional reporting by Wong Siew Ying

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STI off to poor start on China fears

A version of this article appeared in the print edition of The Straits Times on January 05, 2016, with the headline 'Global markets plunge on China, Mid-East fears'. Print Edition | Subscribe