The Cable

U.S. and Chinese Stocks Off to a Very Bad Start to 2016

U.S. and Chinese stocks get bludgeoned on the first trading day of 2016.

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U.S. stocks followed Chinese equities deep into the red Monday, a stark reminder that the slowdown of the world’s second-largest economy is having significant consequences far from Beijing.

Chinese stocks were down so steeply Monday that regulators triggered so-called “circuit breakers,” which halt all trading when losses or gains of 5 percent are met. This is the first time officials in Beijing have ever used the emergency measure.

But it did little to halt the rout. The CSI 300 index of the largest listed companies in Shanghai and Shenzhen lost 7 percent of its value Monday. The benchmark Shanghai composite index fell 6.9 percent, while the Shenzhen composite lost more than 8 percent. It’s the worst day of losses on the Shanghai composite since August last year, during the depths of a 40 percent summer drop.

The sell-off in China sparked a similar one in New York, where the Dow Jones industrial average plunged hundreds of points just after trading began. As of 3:06 p.m. in New York, the index was down 420.69 points, or 2.41 percent, the worst opening day loss in 84 years. It closed down 276.09, or 1.58 percent, for the day. In Germany, the DAX was also down 4.3 percent.

The rout began when a survey by the Chinese media group Caixin released Monday showed China’s official manufacturing purchasing managers’ index fell to 48.2 in December, from 48.6 the previous month, a number below expectations. Any measure under 50 shows a slowdown in manufacturing.

“I didn’t see that coming,” Kit Juckes, a strategist at Société Générale, told CNN Monday. “A dreadful start to the New Year for global market sentiment has seen circuit-breakers in action in the Chinese equity market.”

The bloodletting in both China and the United States is a reminder that China’s economy, which managed to sustain growth through the Great Recession while the rest of the world suffered, is not as powerful as it once was. It’s not yet clear whether Beijing met its 7 percent growth target for 2015. But it is clear that exports out of China — an important part of its economy — were down sharply throughout the last year.

Monday’s losses will also likely prove to be a test for Chinese regulators. Throughout 2015, officials in Beijing took steps to liberalize their economy, including allowing their currency to float and allowing market rates to determine the interest rate Chinese savers get on their money. They were rewarded by the International Monetary Fund, which made the Chinese currency, the renminbi, an official reserve currency, along with the U.S. dollar, the British pound, the Japanese yen, and the euro.

The circuit-breaker provisions were created by Chinese officials in December of last year but had yet to be used. Monday’s massive losses show they might not be enough to rescue its stock market from another tumultuous year, according to Gu Yongtao, a strategist at Cinda Securities.

“The slump apparently triggered intensified selling, while the trigger of the circuit breaker seems to have heightened panic, as liquidity was suddenly gone, and this is something no one has experienced before. It was a stampede,” Gu said, according to Reuters.

Photo credit: Spencer Platt/Getty Images

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