Chinese markets fell 7 per cent today triggering the temporary suspension of trading and this will not be a stand alone episode, experts warn.
Today the Chinese blue-chip CSI 300 index ended down 7 per cent, while the Shanghai Composite Index lost 6.9 per cent following a series of new negative economic data.
The losses are being attributed mainly to weak factory survey data released over the weekend, as well as the steadily weakening yuan and new ‘circuit breaking’ mechanisms in the market.
The December Caixin PMI manufacturing index came in below expectations at 48.2 versus 48.6 in November, indicating a production slowdown for the 10th consecutive month.
Experts say another reason for the poor performance of the Chinese stock market today could be a potential release of RMB 186bn worth of restricted stocks to the market in January alone.
Today also marked the first day that China’s so-called circuit breakers, which are intended to curb volatility, were in effect. The new mechanism means a 5 per cent move in markets triggers a 15 minute halt for market trading, while a 7 per cent drop halts trading for the day.
Axa Wealth head of investing Adrian Lowcock says the suspension of Chinese stock market trading is a reminder that the stock market can be volatile but the big factor to consider is how this affects global growth.
He says: “The Chinese market fall of today is telling us that China’s economy is not landing as softly as we thought. China will continue to weigh on markets for a while especially if you combine this with the turmoil in Middle East as well as concern on the oil price drop. We’ll have a few bad days coming.”
JP Morgan Asset Management chief global strategist for Asia Tai Hui says investors may be concerned that the circuit breaker could worsen China market liquidity and may have exacerbated the sell off as the CSI 300 index hit the 7 per cent drop 20 minutes after the first 15 minute suspension ended.
He says: “Although the circuit breaker was intended to calm the market, it actually drew the opposite reaction from Chinese investors today.”
Hargreaves Lansdown head of investment research Mark Dampier says the fall in the Chinese stock market has little to do with the negative December PMI data and more to do with market fears.
He says:”[The stock market fall] has far more to do with worries that major shareholders will reduce their positions after the ban of share sales and short selling which came in at the end of trading on Friday.”
He says long-term investors need to ignore much of this “short-term noise” and see market falls as buying opportunities.
Fidelity International investment director for Asian equities Matthew Sutherland adds that despite the Chinese economy’s slowdown, the breadth of its stock market is the key element to consider to find new opportunities.
He says: “Equity markets in general are likely to be volatile this year and we’d better get used to it. It’s important that investors don’t panic on weak days, but continue to take a disciplined and calm approach to investing.
“Yes, China’s growth is slowing, but the quality of that growth is far more important, and the difficulties are more than discounted in cheap valuations. And for equity investors, the really good thing is that the Chinese stock markets are very broad, which enables us to find lots of great bottom-up ideas irrespective of the macro environment.”