It was a bad day for the Shanghai Composite Index (SHCOMP) that saw a plunge of 8.5 percent, for the second day in a row. This is the single biggest fall in a one day, since the 27th of February back in 2007.
Investors not impressed by government efforts
The Chinese government scrambled to calm investors, but their efforts seem to have made little headway with sell-off being the flavor of the day in the market. While the SHCOMP closed at 3,725.56, the Shenzhen Composite did not emerge unscathed either, recording a drop of 7 percent to end the day at 2,160.09. The small-cap ChiNext registered a 7.4 percent drop closing at 2,683.45. While the country’s main index recovered marginally, it is a long way from its highs in June.
Until June, the Chinese stock markets had been heading north to dizzying heights for about a year. A three-week rally ended with the recent turn of events and sell-offs. A total of about 21 brokerages had earlier extended their support, committing to continue to support it as it navigated the sub 4500 levels. It is believed that some brokerages’ support could have run into several hundred billion yuan. The government had brought into force some rather strict norms to prevent sell off by major investors in the market and also stepped in to get state run entities to invest.
No smoke without a fire
The uncertainty comes from investors concern over whether the government is attempting to test the waters to see how the markets will cope on their own, and cutting back on the purchase of blue chips. The erstwhile support extended may not be something that could have been sustained in the long run, and this is the first step towards seeing how things will turn out in the absence of the propping up. According to some analysts, the government would rather keep its funds to help keep markets stable and not to bump it up to 5000 plus levels.
Margin trading has been under scrutiny, with brokerages limiting the credit available for financing the purchase of stocks. This could have contributed to the sell off.
Investor sentiment is also down, with the country’s industrial profits dropping 0.3 percent year on year for June. The strengthening dollar has added pressure on Asian currencies.
Ripples felt across the Far East
The fallout off the SHCOMP decline could be felt in Hong Kong’s Hang Seng as well as Japan’s Nikkei and South Korea’s Kospi which all registered a dip. This latest development comes at a bad time, as Chinese manufacturing and the markets were already dealt a blow that rattled the commodities market and saw copper, and gold sell-off. While gold has recovered from its five year low, other metals are yet to recover ground.