‘Black Monday’ on Chinese stock market as shares plummet by more than 8% and the world’s second biggest economy continues its freefall Monday August 24,2015

• Chinese stocks have plummeted in the worst day of trading since 2007
• Shanghai index fell more than 8 %, losing all gains for previous year
• Initiative to allow investment from pension funds failed to prevent freefall
• Knock-on effect being felt across the world, in UK, Australia and Europe 

Chinese stocks plummeted in a ‘Black Monday’ crash that saw the worst day of trading since the start of the global financial crisis eight years ago in 2007
The global financial bloodbath started after the Shanghai composite index lost 8%, proving ineffective a series of steps that the Chinese government and its market regulator had taken in the last few weeks to stem outflow of money from the country.



 

A dramatic fall today has sent the global market into panic, on the heels of last week’s serious losses.

The Shanghai index crashed more than 8 % in morning trading, effectively shedding all its previous gains for the year.

The fall has spanned every corner of the market in China, the world’s second largest economy, with small-cap growth stocks and state-owned blue chips dropping at roughly the same rate. 

WHAT'S HAPPENING IN CHINA AND WHERE CAN THE ECONOMY GO NEXT?

What has China done to try to stop shares falling?

A range of measures were introduced last month after Shanghai stocks slumped more than 30 per cent from their mid-June peak. But their impact has since evaporated.

The government’s early July rescue package included funding the state-backed China Securities Finance Corp (CSF) to buy stocks on behalf of the government.

Other measures include barring ‘big’ investors from selling their stakes and cracking down on short-selling – when investors bet prices will go lower.

On Sunday, authorities said the state pension fund would be allowed to invest 30 per cent of its total assets – which according to the official Xinhua news agency amount to 3.5 trillion yuan (£350billion/$550 billion) – in shares.

Beijing has also cut interest rates and issued a shock devaluation of its currency of nearly 2 per cent on August 11, causing the yuan to fall almost 5 per cent over that week, which should give exporters a boost.

Where next for China’s stock market and currency?

Despite major efforts to support the market, analysts say shares are likely to go still lower.

The yuan is widely expected to weaken further against the US dollar, although the central bank is expected to intervene to prevent steel slides.

Why are financial markets so gloomy about the Chinese economy?

China's economy expanded just 7.4 per cent last year, its weakest since 1990, and growth has slowed further this year, measuring 7 per cent in each of the first two quarters.

It is a far faster growth rate than most other major countries, but the yuan move raised suspicions that the state of the economy is worse than officials have revealed.

China's second quarter gross domestic product (GDP) figure exactly met the government's full-year target of ‘around’ 7 per cent, leading some analysts to question the announcement, which came after several weak indicators. China has long faced accusations that the government massages economic figures during times of slowdown.

Why is slowing growth such a problem domestically?

Experts say China’s ruling Communist Party needs to deliver improved living standards, lifting more people out of poverty and satisfying the growing middle class, in exchange for acceptance of its rule.

The government also needs to maintain a minimum level of economic growth, which some analysts put at 7 per cent, in order to create jobs for millions of people and prevent social unrest.

Why is slowing growth a problem internationally?

With Europe’s economy weak and the US preparing to raise interest rates, the world has looked to China’s thirst for raw materials to keep finances humming.

With more than 1.3 billion potential consumers, the country is also a big market for manufactured goods such as cars.

Any weakness in demand could be keenly felt by producers.

Is the panic justified?

Analysts are unable to agree. Many insist that China can still deploy further interest rate cuts and spending measures.

‘We continue to believe that sentiment is currently overly downbeat and that policy support will limit the downside risk to economic activity over the course of the next couple of quarters,’ said Capital Economics.