New Year’s events “can be anti- climactic”, says Lex in the Financial Times. But in China, markets “began 2016 with enough excitement to make traders choke on their bubbles”. The blue-chip CSI 300 index fell 7% last Monday, the worst-ever start to the year for Chinese markets. It made a marginal recovery the next day, although the wider Shanghai Composite index and the Shenzhen Composite index fell further.
The Chinese authorities are showing that “there’s no amount of stockmarket volatility that government interference can’t make worse”, says Alistair Osborne in The Times. After constantly meddling with the market during last summer’s slump, it has introduced a circuit breaker: the exchange halts trading after a 5% move and closes completely after a 7% one. What a flop. “The whole caper’s become self-fulfilling.” Knowing that trading can be halted, investors now have an extra incentive to get out.
Worrying about a downturn
So what caused the panic in the first place? It can’t have helped matters that a six-month ban on investors holding over 5% of a listed stock selling shares was due to expire on 8 January (it was ultimately extended in an effort to calm markets). But the immediate trigger for the selling appears to have been official data showing that the manufacturing sector has now been shrinking for five months. This added to concerns that the economic slowdown could be worse than expected.
The fuss looks overblown, says Capital Economics. Outside of manufacturing,things look better. The official gauge of activity in the service sector has risen to a 16-month high. Indicators designed to measure how the economy is doing without relying on questionable official statistics are also looking up: electricity output in November was up year-on-year for the first time since August.
Focus on the long term
Over the past year, the government has cut interest rates and eased lending restrictions. It has also made clear that it will do more to prop up the economy if need be, through a further loosening of monetary policy and higher government spending. So long as the near-term economic backdrop gradually improves and the renminbi avoids an unruly depreciation, investors should soon turn their attention back to the long-term potential of China’s consumer sector.