China overtakes Greece as the biggest threat to global markets

The CSI300 index of major companies in Shanghai and Shenzhen closed down 6.8 per cent on Wednesday, while the Shanghai Composite Index plummeted another 5.9 per cent, bringing its losses since the mid-June peak to 35 per cent now.

For investors, China\’s stock market crash is another worrying rise in an already-fraught global economy. But for China\’s ruling Communist Party, the crash would likely represent an existential threat.

The scale of China’s response to the crash, which has wiped out 30 percent of its stock markets’ value in less than a month, implies that the Communist Party is scared of losing control. The bubble, after all, is one of the government’s own making. State media reports had endlessly touted the benefits of equity investing to ordinary Chinese in the months prior to the crash, and Beijing staked its prestige on which had become the world’s hottest stock markets.

The crash has left officials in Beijing, accustomed to enacting total charge of every aspect of China’s economy, looking ineffective. Worse, investors see their seemingly desperate responses as worsening the panic.

“If the supposedly omnipotent Communist Party show such ineptitude with regard to stock markets, who\’s to say the same thing won\’t happen using the wider economy?” said Jasper Lawler, market analyst at CMC Markets. “If China\’s authorities do lose control of the economy, it\’ll have huge negative implication for global growth, by implication global stock markets.”

During the weekend, the People’s Bank of China cut interest rates and lowered its bank reserve requirements, hoping the moves would boost liquidity and prevent the crash. Markets responded Monday by spiking eight percent, before crashing again. Chinese stocks have now declined every single day this week.

The PBoC announced further measures Wednesday saying it is now actively pumping liquidity into China Securities Finance Corp., a service provider of financing and margin lending to brokers in the united states. The CSFC, because of its part, is loading on Chinese stock to assist alleviate “the problem of strained liquidity.”

Government-owned companies are also ordered not to sell their shares.

There are increasing fears the crash represents a contagion threat to both China’s economic climate and broader global markets. The Nikkei fell more than two per cent Wednesday to some seven-week low, while the S&P 500 was off one percent, to 2,059.13.

“It suggests desperation,” Mark Mobius, chairman of Templeton Emerging Markets Group, said within an interview Wednesday. “It really creates more fear because it shows that they’ve lost the control.”

A lack of confidence in Beijing explains why the marketplace continues to fall even as the government has enacted a new policy every single day to try to stem the bleeding. The CSI300 index of major companies in Shanghai and Shenzhen closed down 6.8 percent on Wednesday, while the Shanghai Composite Index plummeted another 5.9 per cent – bringing its losses since the mid-June peak to more than 30 per cent now.


There are also growing fears that the crash represents a contagion threat to China’s financial system. Officials in Beijing took steps in recent years to try to strengthen China’s banks as periodic liquidity issues have cropped up. But policy has mainly been targeted at shielding banks from any crash in the housing market or a slowdown within the broader economy. A regular market crash is a whole new challenge for the Chinese government.

\”If the market continues to fall sharply, stock lending-related losses could run into [the trillions of yuan], which banks and brokers might have to bear a meaningful share,\” said David Cui, head of China equity strategy at Bank of the usa.

In a show of precisely how afraid Chinese companies are, 1,476 stocks out of 2,808 listed companies in China, which represent some $2.6-trillion price of equity, have suspended trading of their shares. There\’s been no clarity round the suspensions and just how long they could last, with a few analysts saying months is not unthinkable.