SHANGHAI SHARES PLUNGE 8.49% AS CHINA’S MARKET CRISIS DEEPENS

SHANGHAI, 2015-08-24. — Chinese shares suffered their sharpest one-day fall in more than eight years today, intensifying a summer stock-market crisis and sending fresh alarm through international markets. The Shanghai Composite Index closed down 297.83 points, or 8.49 per cent, at 3,209.91, its worst daily percentage loss since February 2007. Selling swept across the market despite a weekend government announcement permitting pension funds to invest in shares. The collapse leaves investors confronting a question that repeated rescue measures have failed to settle: whether official support can arrest the retreat while confidence in China’s economic growth is also weakening.

The damage extended well beyond Shanghai’s largest companies. The Shenzhen Component Index lost 7.83 per cent, while huge numbers of mainland shares reached their daily downward trading limits, normally 10 per cent. Those limits restrict the price at which a share may trade during a session, but they offer little comfort to holders unable to find buyers. Today’s fall followed an approximately 11.5 per cent slide in Shanghai last week. The benchmark now stands nearly 38 per cent below its June 12 closing peak of 5,166.35, erasing much of the extraordinary advance that drew millions of individual investors into the market.

Across Asia, the response was swift and severe. Hong Kong’s Hang Seng Index dropped 5.17 per cent, and Japan’s Nikkei average fell 4.61 per cent. European exchanges also opened sharply lower as the selling moved west. Oil and industrial commodities came under renewed pressure from concern that weaker Chinese demand would prolong the difficulties facing producers. The international retreat reflects more than foreign investors’ direct exposure to mainland equities. China is a major customer for exporters, a central market for raw materials and an increasingly important influence on corporate earnings, making uncertainty over its prospects difficult for other exchanges to escape.

The immediate economic background is troubling. A preliminary Caixin survey released on Friday put China’s manufacturing purchasing managers’ index at 47.1 for August, its weakest reading in more than six years and clearly below the 50 mark separating expansion from contraction. Earlier figures showed exports falling in July. The government is seeking growth of “around 7 percent” this year, the target Premier Li Keqiang presented to the National People’s Congress in March. Official figures put second-quarter growth at 7 per cent, but the deterioration in manufacturing and trade has sharpened doubts about the strength of activity beneath that headline number.

China’s currency adjustment earlier this month has added to the uncertainty. On August 11, the central bank changed the way it set the renminbi’s daily reference rate, allowing a larger role for the previous day’s market closing price. The currency subsequently weakened, unsettling investors already anxious about growth. The International Monetary Fund described the move towards a more market-influenced rate as “a welcome step”, but financial markets have also treated the depreciation as a possible sign of pressure on the economy. For foreign businesses and investors, the change complicates calculations about Chinese purchasing power, export competition and the value of investments held in renminbi.

Beijing’s latest effort to broaden demand for shares arrived on Sunday, when the State Council published rules allowing basic pension funds to invest in the stock market. Under the framework, up to 30 per cent of a fund’s net assets may be placed in equities and related investments. The measure opens a potentially important channel for long-term institutional money, contrasting with the short-term trading of many individual investors. But permission to invest does not mean immediate purchases on the exchange. Today’s rout showed that the announcement alone could not persuade sellers to wait or convince buyers that prices had reached a dependable floor.

The authorities have already committed substantial political and financial resources to stabilising equities. Since the summer sell-off began, measures have included interest-rate reductions, support for securities financing, restrictions on sales by major shareholders and a halt to new share offerings. State-backed buying has become a central feature of the rescue effort, while brokerages have pledged money to support the market. These interventions helped interrupt the earlier plunge, but the renewed falls expose the difficulty of sustaining confidence through official purchases. Investors must judge not only company prospects and valuations, but also how far the state is prepared to extend its support.

The reversal follows a boom that gathered speed last year and carried the Shanghai index to more than twice its level of twelve months earlier by June. Borrowed money helped finance the ascent: margin trading allowed customers to buy shares with loans secured against their holdings. That mechanism can accelerate a decline when falling prices trigger demands for additional collateral or force investors to sell. Efforts to curb risky financing have therefore intersected with a market already vulnerable to abrupt changes in sentiment. For households that entered late in the rally, the retreat means substantial losses rather than merely the surrender of earlier paper profits.

The stock-market fall is not a direct measure of the contraction or expansion of China’s entire economy. Mainland share prices rose far faster than economic output during the boom, and their collapse cannot simply be read as an equivalent fall in national wealth or production. Nevertheless, the disturbance creates practical risks. Losses can discourage household spending, falling valuations can complicate company fundraising, and persistent instability can undermine confidence in financial policy. The rescue campaign has also made market performance a conspicuous test of official credibility, even though authorities must balance the demands of shareholders against wider objectives for reform and economic stability.

Attention now turns to whether Beijing will announce further monetary easing or reinforce its market-support programme. Another interest-rate reduction, easier bank-reserve requirements or additional state-backed purchases could provide relief, but none would automatically resolve doubts about corporate earnings or economic demand. There is also no assurance that pension money will arrive quickly enough to influence the next trading session. At today’s close, the evidence is stark: a major policy announcement has been followed not by recovery but by the steepest Shanghai sell-off since 2007. Investors face the next opening with sharply reduced confidence and no clear indication that the selling has run its course.