Chinese shares had a tumultuous start to the new year with the benchmark CSI 100 index closing down 10 per cent. So what were the main factors behind the turbulence?
The slowing Chinese economy
China is trying to move away from export-led growth towards a more sustainable, domestic consumption-led economic model. Nevertheless, fears over the pace of its slowdown are haunting global markets, with Black Monday in June wiping more than one trillion dollars off the value of the world’s top companies.
That weak manufacturing data
Weak Chinese economic data routinely stokes fears over the pace of China's economic slowdown and weighs on its stock markets. This was no different on Monday - when a survey showing Chinese manufacturing activity contracted for a 10th consecutive month in December, sending shares around seven per cent lower.
But this was also when China's new circuit-breaker mechanism, which is triggered when stocks fall more than five per cent, came into effect. Consequently Chinese shares were suspended for the first time this week.
But the real reason was ...
Market mavens subsequently said the real reason behind the commotion on Monday was the imminent expiration of a share sales ban on listed companies' major shareholders. The ban, imposed during the crash of last summer, was causing investors to dump stocks.
The circuit-breaker mechanism
Some market commentators have said China's circuit-breaker mechanism was exacerbating volatility by suffocating the market. The rule, introduced in response to volatile trading over the summer, kicks in when the stock market loses more than five per cent.
But Chinese authorities yesterday scrapped the controversial circuit-breaker mechanism, which had halted trading on the country's stock markets twice this week. This appeared to please investors, with the benchmark CSI 100 index closing up two per cent at 3,361.56 points.
Chinese equities took another tumble yesterday after the Chinese central bank's shock decision to set the official midpoint rate of the renminbi at 6.5646 per dollar, its lowest level since March 2011, compounding fears over a slowdown in economic growth.