Chinese stock market drops 8.5 per cent

UPDATE: Australian shares are lower across all sectors as Chinese stock markets continue to tumble following Monday’s massive sell-off.

UPDATE: China’s benchmark Shanghai stock index has slumped 4.09 per cent at the open, despite a renewed government vow to support the market after the biggest fall in eight years a day earlier.

The Shanghai Composite Index plunged 8.48 per cent on Monday, the biggest fall since February 27, 2007, despite a broadbased government effort to shore up prices following a weeks-long rout. The benchmark narrowed some of the losses in morning trade on Tuesday and was down 2.12 per cent, or 78.88 points, to 3,646.68 later.

The Shenzhen Composite Index, which tracks stocks on China’s second exchange, was down 3.52 per cent, or 75.93 points, to 2,084.16.

The falls came despite comments by the market regulator, the China Securities Regulatory Commission (CSRC), that it would continue to “stabilise” the market.

The state-backed China Securities Finance Corp, charged with stabilising the market, would continue to increase its share holdings, the CSRC said in a statement late on Monday.

“It’s a normal correction of the market since it rose too much before,” Zhang Yanbing, an analyst at Zheshang Securities, told AFP.

He added it would take some time for trading to become less volatile.

“In the future, the market will gradually rise and stabilise and finally return to a normal state,” he said.

The government intervened after the market plunged 30 per cent in just three weeks from mid-June, having risen more than 150 per cent in the previous 12 months.

Early efforts failed to change sentiment, until the government banned shareholders with more than five per cent stakes from selling stock and launched a police crackdown on short selling. The market rallied for six sessions until Friday, when an independent survey of manufacturing activity hit a 15-month low in July.

Shares in Hong Kong dipped 0.34 per cent in the opening minutes on Tuesday following a more than three per cent slump in the previous session and another rout in mainland markets.

The city’s benchmark Hang Seng Index eased 82.06 points to 24,269.90.

Some analysts said Monday’s dive was set off by brokerages restricting credit used to finance stock purchases, also known as margin trading. Chinese authorities took aggressive steps to stabilise the market after it tumbled last month.

“The continuous check on margin trading by security companies has triggered today’s sell-off,” said Xu Xiaoyu, a market strategist at China Investment Securities. “In addition, the recent economic data shows it still takes time for the economy to recover from its sluggishness.”

The precipitous rise and fall of the Chinese stock market has been one of the bigger topics of conversation for investors this summer.

By the time China’s Shanghai benchmark index peaked in early June, it was up 150 per cent in the last year. The gains were originally driven by commentary in state media that called the stock market undervalued. That led investors to believe the government would ensure that stock prices gained.

When the Chinese stock market started falling, many investors felt the decline would bring a much-needed correction to that country’s stock market bubble. But many small Chinese investors jumped into the market near its peak and are now sitting on significant losses.

There are now concerns the 30 per cent decline in the stock market is starting to do damage to China’s economy. A closely watched Chinese purchasing manager’s index fell to a 15-month low over the weekend, with analysts blaming the drop partly on the market.

“Rightly or wrongly, people are concerned about a global economic slowdown,” said James Liu, a global market strategist with JPMorgan Funds.

The Chinese sell-off ruffled other markets in Asia, though the scant amount of foreign investment in Chinese shares limits the ripple effects outside of Hong Kong, a semi-autonomous Chinese territory that is also a financial centre.

AUSTRALIA

The Australian share market has closed slightly lower as Chinese markets fluctuate wildly.

At the close on Tuesday, the benchmark S&P/ASX200 index was 5.2 points, or 0.09 per cent, lower at 5,584.7, while the broader All Ordinaries index was down 8.2 points, or 0.15 per cent, at 5,571.0. On the ASX 24, the September share price index futures contract was eight points lower at 5,530, with 33,919 contracts traded.

A tumble in materials prices followed the Shanghai Composite’s slide and fanned ongoing insecurity over weaker demand from key consumer China. Copper prices hit a six-year low.

The big miners felt the hit on Tuesday morning.

CMC Markets chief market strategist Michael McCarthy said he expected investors would continue to shun commodity-related stock. “Materials-based stocks are leading the downward momentum with pressure across the board seeing a further sell-off of commodities,” he said.

“There are real concerns with ongoing supply in the face of weaker demand.” Among the big miners, Rio Tinto was 63 cents weaker at $50.56, BHP Billiton had fallen 50 cents to $25.02, Woodside Petroleum was down 27 cents at $33.59 and Fortescue had dropped three cents to $16.8.

UNITED STATES

The tough day follows declines in U.S. markets last week, when the three major indexes fell more than 2 per cent as a number of big companies reported disappointing earnings.

Faced with a drop in stock prices in Asia, Europe and the U.S., investors moved into traditional safe havens. The yield on the 10-year U.S. Treasury note fell to 2.22 per cent from 2.26 per cent on Friday. The price of gold rose 1 per cent.

Dividend-heavy stocks, like utilities, also gained. Investors favour high-dividend companies during times of volatility because they provide a reliable income stream.

“There remain very few buyers out there and there are some growing concerns that we’re looking at a slowdown in global economic growth,” said Sean Lynch, co-head of global equity strategy with the Wells Fargo Investment Institute.

The Dow Jones industrial average lost 127.94 points, or 0.7 per cent, to 17,440.59. The Standard & Poor’s 500 index lost 12.01 points, or 0.6 per cent, to 2,067.64 and the Nasdaq composite lost 48.85 points, or 1 per cent, to 5,039.78.

It was the fifth straight loss for the U.S. market. The S&P 500 is still up about half a per cent for the year. The Dow is down 2 per cent and the tech-heavy Nasdaq is up 6 per cent.

EUROPE

In Europe, which has already had a volatile summer because of worries about Greece’s precarious finances, also fell broadly on Monday.

The Euro STOXX 50 index, the European equivalent of the Dow 30, fell 2.4 per cent. Germany’s DAX lost 2.6 per cent, France’s CAC-40 lost 2.6 per cent and the U.K.’s FTSE 100 lost 1.1 per cent.

Elsewhere, traders were turning their attention to the U.S.

Federal Reserve as they try to assess when the central bank will start raising interest rates. The market appears split between those who think it will happen in September or December. The central bank will also meet this week, but few expect it to begin raising rates.

Traders also have the busiest week for second-quarter earnings reports this week, with 174 members of the S&P 500 as well as six members of the Dow average reporting their results.