China have brought in the New Year with what they hope won’t become a new tradition – closing the stock market early. Trading in on the Shanghai and Shenzhen stock markets were suspended earlier today (04/01/2016) after shares fell sharply to lose 7% of their value.
The blue-chip CSI 300 Index dropped 7% whilst the ‘benchmark’ Shanghai Composite index fell 6.9%. However, the worst performer of all was the technology led Shenzhen Composite, which fell by more than 8% overall. In an effort to ease fears and stem the fall, trading had been halted earlier in the day for 15 minutes after an initial 5% fall, but upon its return stocks continued to plummet, causing the regulators to cease trading for the day in one of the world’s largest and most important markets.
The move is permissible under China’s new circuit-breaker mechanism, which triggers a trading suspension if moves of 7% from the previous session’s close are sensed. These new measures were introduced last month after China’s stock market underwent a period of extreme uncertainty during the summer months of 2015. Those months saw the value of China’s businesses and economy fall dramatically as it emerged that China’s famed growth was slowing down further.
This latest fall is linked to a manufacturing survey that further points to failings in the Chinese economy. The Caixin/Markit purchasing managers’ index (PMI) slipped to 48.2 in December, which marked the 10th consecutive month of shrinking activity within this essential sector. For context, a PMI score of 50 indicates an industry that has seen stagnation, so a score of 48.2 shows a sector in decline. Meanwhile, a private PMI study, which looked at small and medium sized businesses suggested a fifth straight month of shrinking factory activity in the country.
To understand the importance of this, it’s key to think about how the Chinese economy is structured. Over the last 50 years, we’ve seen manufacturing outsourced on a huge scale to China, with everything from clothes to smartphones being made in the country before being shipped abroad. With falling demand from across the world and many companies choosing to keep manufacturing ‘in house’, China’s overall economy could be in some serious trouble.
China’s economy has been described as the ‘engine of global growth’, and as that engine begins to splutter and slow, so does that global growth. Instability and a lack of confidence in China is often felt elsewhere around the globe. We’ve seen early indicators of this in other Asian markets, as Hong Kong’s Hang Seng index closed down 2.7% and Japan’s Nikkei 225 index closed 3.1%
Whether this lack of confidence continues through January and into the remainder of 2016 is a matter for speculation, but investors around the globe will certainly hope it won’t. Continued falls in the Chinese stock markets would affect the United Kingdom’s manufacturing and service industries heavily, as Chinese investors acted more cautiously in their investments and Chinese businesses and consumers seek cheaper alternatives than the high-quality and high price British goods and services that make up the backbone of our economy.