Why Chinese Stock Markets Tumbled By 6.2%

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Chinese stock markets are at it again. Just when you thought the worst was over, investors are back to their old habits.

How bad was it this time?

On Tuesday, the Shanghai Composite Index (SCI) fell 6.2%. It finished the day on 3,784 points. What’s concerning is that the SCI is now only 240 points above July’s lows. And it’s 27% off its highs in June, just before the $3 trillion selloff mania.

It wasn’t just a few stocks dragging the field down either.

Up to 60% of all SCI-listed stocks hit their daily price limit of 10%. The daily limit is the amount a stock price may rise or fall in any single day.

Meanwhile, the Shenzhen Composite Index fell by 6.6%, to 2,174 points. As with the Shanghai market, over half of all stocks reached their daily price limit.

What caused this sudden drop then? In short: market anxieties.

In the last few weeks, the government began teasing reforms. They had their sights set on state-owned companies. The government suggested it wanted to open up state-owned enterprises to private investment. That’s kept the markets buoyed ever since.

But the worry among investors is that policymakers are going back on their promises. Yesterday’s selloffs started amid fears that the government was waiting too long. Investors want reforms now; they don’t want delays.

Yet that was only the starting point for the market jitters.

As the losses continued during the morning, investors began asking questions. Why wasn’t the government stepping in to stem the flow of selloffs? By midday, everyone was wondering the same, and the jitters turned to panic.

It wasn’t until the final minutes of trading that the selloffs really picked up. The markets hadn’t gotten the assurance from policymakers they wanted. As a result, you ended up with a lot of uncertainty and unease.

When trade resumes today, we could see a quick response from the government. It’s hard to believe they’ll let markets slide for the second straight day.

Cash injection not enough to support Chinese stock markets

Chinese policymakers weren’t completely idle yesterday. But they got overconfident.

For one, the government thought that positive housing data would perk up stock markets. It thought wrong. But it gets worse than that.

The People’s Bank of China injected $25 billion into the financial system. This cash injection came in the form of short-term loans to commercial lenders.

The PBoC did so because of concerns about capital outflows. In the wake of the yuan’s devaluation, the bank is worried that too much money is moving out of China. That’s a problem because capital outflows result in higher rates.

The PBoC’s measure also registered as largest single day capital injection in 19 months.

And yet…markets fell 6.2%. That’s a worrying sign. And not just for investors, but for the Chinese economy as a whole.

If the Chinese government is to ease stock market anxieties, it needs to act quickly. That might mean fast-tracking reform for state-owned enterprises. It’s hard to say whether this is enough to stem short term selloffs.

With fears about the economy’s ongoing stability, it could be easier said than done.

Mat Spasic,

Contributor, The Daily Reckoning

 

PS: Chinese stock markets aren’t the only ones with clouds hanging over their future. The Aussie share market has a few dark clouds of its own.

The Daily Reckoning’s Vern Gowdie believes the ASX is set for a catastrophic crash.

Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s ranked as one of Australia’s Top 50 financial planners. Vern’s convinced the ASX could lose as much as 90% of its $1.8 trillion market cap.  And that’s why he’s written ‘Five Fatal Stocks You Must Sell Now’ for you.

In this free report, Vern identifies the five companies which could destroy your wealth. It’ll surprise you to learn which blue chip stocks made his blacklist. And he’s identified one major commodity stock that could catch you by surprise. To find out how to download the report, click here.

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