Chinese stocks have plunged even further and are at their 13-month low, exposing the deep-rooted troubles in the Chinese economy as People’s Bank of China continues to push huge sums of money into the system. The Shanghai Composite Index has fallen by a steep 6.4 percent to 2,749.79, says Bloomberg News.
It may not be surprising that the fall in Chinese stocks was a result of the sell-off in the United States on Monday, caused primarily by the fall in the price of oil, the New York Times has said. The global oil prices are an indicator of world’s economic health, and the fall was reflected in the Chinese stocks, as well. However, the reasons for China’s plummeting stock market are more deep rooted than one would imagine. There is a market volatility looming over the country because of its growth concerns. Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai, expressed concern over the current situation of Chinese stock market.
“It’s an issue about confidence and there’s no confidence in the market now.”
Many have called it the end of an exquisite fairy tale as the Chinese economy grows at its slowest pace in last 25 years. Moreover, the country is struggling with a glut of sick factories that manufacture cement, glass, and steel. China is seeking to turn itself into a consumer-driven economy from a manufacturing-driven one, because of which it is closing many of its steel factories. This could cost the Chinese 400,000 jobs. Li Xinchuang, from the China Metallurgical Industry Planning and Research Institute, told Xinhua news agency that “Large-Scale redundancies in the steel sector could threaten social stability.” There is also a deep rooted concern about the debt-financed investment.
This loss to the Chinese stocks is the sharpest since Jan 7, when Chinese stocks fell 7 percent. Stocks continued to fall even as the People’s Bank of China poured in $67 billion into the financial system using reverse-repurchase agreements. The slump has been seen in pretty much all industry groups, ranging from technology to commodity shares. The data showed that outflows hit $1 trillion last year, which concerned several investors about a possible liquidity squeeze. This sentiment was not changed by the Chinese central bank flooding the financial system with cash before the upcoming Chinese new year holiday. Some forecasters have said that the worst is yet to come, and that the Chinese stock fall may not stop until it has reached the 2,500 level, Bloomberg News has said.
It must be said that the plunging Chinese stocks are a result of the stock market bubble that popped on June 12, 2015. The aftershocks of this stock market casualty occurred on July 27 and on August 24 (Black Monday). Although by the end of December, 2015, Chinese stock market had recovered from the fall, it still did not go back to the June, 2015, levels. This year has not been good for Chinese stock markets at all, as trading was halted on January 4 and 7, after there was a sharp fall in the market. This happened within 30 minutes of market opening.
Since the stock market crash last year, the People’s Bank of China has been devaluing the Yuan, causing much concern the world over. During the World Economic Forum in Davos last week, Chinese Vice president Li Yuanchao went as far as to say that China’s market was not mature yet. He also pledged that regulation would be used by Chinese market to tame the fluctuating market. There is no telling when China would stop burning through its reserves to reduce the Yuan volatility. All that can be said is that the government will continue to take tough measures as Chinese stocks fall further.
[Photo by China Foto Press/Getty Images]