UBS: China - What Happened and Why?
China A-share market recorded a sharp decline on the first day of trading in 2016. Trading was halted on the CSI 300 in early afternoon local time after the index of largest companies listed in Shanghai and Shenzhen fell 7%. Under new rules designed to reduce volatility, a fall of 7% triggered an end to the day's trading. What were the reasons?
07.01.2016 | 09:33 Uhr
Investors' concerns about the pace of economic slowdown in China came to the fore. While a lack of liquidity in the first trading day of 2016 may have exacerbated these concerns, the sell-off was sparked by the release of weaker-than-expected economic data.
The Caixin Manufacturing Purchasing Managers' Index (PMI) for December came in well below market expectations. December's 48.2 reading represents the tenth consecutive month of industry contraction according to this measure (a score of above 50 indicates growth).
The Caixin PMI only served to fuel investors' already heightened fears about the pace of sustainable growth in China with the survey revealing falling output, weak export orders and a further deterioration in the PMI's employment component.
Other factors contributing to the decline included selling ahead of the imminent end to the ban on major share sales. In July 2015, the China Securities Regulatory Commission responded to heightened equity market volatility by banning company directors and major investors with holdings of more than 5% from selling for six months. Other investors clearly expect pent-up sales to dominate market activity when the ban is lifted on January 8.
Chinese equities listed in Hong Kong, which have not been subject to the same restrictions, fell 3.5%.
Broader Market Reaction
On foreign exchange markets, the Chinese renminbi weakened against major currencies including the US dollar. Ahead of the US business day, equity markets across Asia and Europe took their lead from China and posted falls of between 2% and 4%. Concerns about heightened geopolitical risks are adding to the selling pressure in the wake of the escalating political tensions between Saudi Arabia and Iran.
China's Response
The Chinese authorities have responded swiftly to yesterday's falls. The PBoC injected USD20bn into the money market to calm investors. Elsewhere, the Chinese stock market regulator said it was considering additional measures to improve market stability that include fresh restrictions on stock sales.
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