China stock market plunge: Why did it happen and what's next?

China stocks resumed falling on Tuesday despite the government unveiling an unprecedented package of measures to boost the flagging market. PHOTO: EPA

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JUL 7, 2015, 2:49 PM SGT

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SHANGHAI (AFP) - China stocks resumed falling on Tuesday (July 7) despite the government unveiling an unprecedented package of measures to boost the flagging market after a spectacular bull-run reversed course in June.

WHY DID THE MARKET SURGE?

China's stock market surge started in late 2014 despite the country's gross domestic product (GDP) experiencing its slowest growth in 24 years.

The borrowing-fuelled rally began after China's central bank cut interest rates on November 21 for the first time in more than two years, and the launch of a scheme linking trading between the Shanghai stock exchange and Hong Kong bourse.

The rally continued in 2015 with the benchmark Shanghai index climbing to the symbolic 5,000-point level in early June, driven higher by margin trading, through which investors only need to deposit a small proportion of the value of their trades, generating bigger profits - but also bigger losses.

When it peaked on June 12 it had risen more than 150 per cent over the previous 12 months.

WHY DID IT FALL?

On the same day as the market reached its peak, China's securities regulator said it would tighten rules on margin trading for individual investors. The following day, the China Securities Regulatory Commission (CSRC) also banned trading with funds borrowed outside the margin trading system.

When markets reopened investors started to take profits on worries of over-valued stock prices and increasing market risk.

The de-leveraging process soon became uncontrollable, resulting in Shanghai plunging almost 30 per cent over three weeks. Market sentiment worsened as investors who traded on margin were forced to liquidate their stock holdings to make payment.

WHAT'S BEING DONE TO SUPPORT THE MARKET?

The Shanghai index plunged 7.4 per cent on June 26 and the next day China's central bank announced cuts in both interest rates and the reserve requirement ratio - the amount of money banks must put aside.

The market regulator then announced a relaxation of margin trading rules and reduced stock transaction fees.

Soon after the government announced proposals to let social security pension funds enter the stock market.

The CSRC cut back on the number of initial public offerings (IPOs), then went a step further by halting them for the near future.

China's central bank said it would provide funds through the state-backed China Securities Finance Co. to "protect the stability of the securities market", while the 21 largest brokerages said they would invest at least 120 billion yuan (S$26 billion) in so-called "blue chip" exchange traded funds (ETFs).

WHAT HAPPENS NEXT?

No-one really knows and the market remains wildly volatile. Forced sellers could drive prices lower, or bargain-hunters could see a buying opportunity and step in.

"With investors' confidence towards the market shattered, it's really hard to tell when it will start to stabilise and recover from recent falls," Haitong Securities analyst Zhang Qi told AFP. He estimates that the benchmark Shanghai index may rebound to around 4,000 points in the next month.

China just announced more measures to stabilize its stock market - DAVID SCUTT, BUSINESS INSIDER AUSTRALIA

China just announced more measures to stabilize its stock market

• DAVID SCUTT, BUSINESS INSIDER AUSTRALIA
 

• Jul. 6, 2015, 7:31 PM
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REUTERS/Kim Kyung-HoonA man watches a board showing the graphs of stock prices at a brokerage office in Beijing, China, July 6, 2015.

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Having managed to stabilize China’s larger stock indices – the Shanghai Composite and CSI 300 yesterday – Chinese policymakers have implemented additional measures to stabilize the market for smaller stocks.

According to Xinhua, a daily trading limit for the CSI 500 index will be effective from Tuesday, the latest action by China’s financial regulators to prevent more losses. Overnight China’s financial futures exchange said it would limit investors’ daily purchases of CSI 500 index futures to 1,200 lots for rise and fall.

The exchange also stated it would step up efforts to investigate illegal market activities.

The CSI 500 index, comprising the 500 largest companies listed in Shanghai and Shenzhen, has had a particularly bad time of it recently. On Monday, despite gains of 2.42% and 2.90% for the Shanghai Composite and CSI 300, the index fell 1.62%, taking its losses from June 12 to 37.71%.

Over the weekend measures were announced to support larger Chinese stocks with 21 major securities brokers promising to spend no less than 120 billion yuan ($US19.62 billion) on exchange traded funds (ETF) that track the performance of blue chip stocks. They brokers also outlined plans to halt selling stock until the Shanghai Composite index rose above the 4,500 points level while 28 companies which had obtained permission to make an initial public offerings postponed their share issuance.

Central Huijin Investment Company, the investment arm of the central government, also announced it had purchased ETFs and would continue to do so in order to bolster nervy investor confidence.

Saudi Arabia to invest $10B in Russia

Holly Ellyatt | @HollyEllyatt

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Saudi Arabia's sovereign wealth fund is to invest up to $10 billion in Russia over the next five years, in a move signalling a thawing in relations between the two countries.

Saudi Arabia's Public Investment Fund (PIF), the country's sovereign wealth investment vehicle, agreed on Monday to invest $10 billion over the next five years approximately in the Russia Direct Investment Fund (RDIF), a government-run investment fund.

Speaking to CNBC on Tuesday, RDIF's Chief Executive Kirill Dmitriev said that he thought the investment would be "very important" for Russia.

"The first seven projects have received preliminary approval, and RDIF expects to close 10 deals before the end of the year," Dmitriev said when announcing the deal which is the largest foreign direct investment in the country in the last four years.

"This deal is about building an important partnership. Russia needs to be an integrated global player. We are also going to invest in Saudi Arabia, which is a very attractive market for us so the deal is very interesting," he told CNBC.

RDIF also announced it had also signed a partnership agreement with another Saudi Arabian sovereign wealth fund, the Saudi Arabian General Investment Authority (SAGIA).

"The parties will identify attractive joint investment opportunities in the SA and the Middle East," RDIF said.

Asked whether Russia was looking more towards the Middle East and Asia, with whom RDIF also has investment partnerships, Dmitriev reiterated that RDIF had joint investment funds with France and Italy already.

RDIF said the funds from Saudi Arabia would be invested in areas including infrastructure and agriculture, as well as healthcare, retail and real estate.

Russian President Vladimir Putin reaffirmed his support for Assad in June, making Saudi's investment one that could be politically motivated to rebuild relations and get Russia on side over how to end a four-year civil war in Syria. Dmitriev refused to comment on Russia's political background, however.

Read MoreRussia sanctions helping businesses to thrive

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President of Russia Vladimir Putin and Crown Prince Salman bin Abdulaziz Al Saud of Saudi Arabia talk during a plenary session at the G20 leaders summit in Brisbane November 15, 2014.

Russia could certainly do with friends at the moment. Its economy is expected to enter recession this year after a combination of lower oil prices – half the price they were last June – and western economic sanctions for the country's role in Ukraine and annexation of Crimea last year.

RDIF said the agreement was "greatly contributed" to by the visit of Saudi Defense Minister Mohammad bin Salman Al Saud (also the country's Deputy Crown Prince) during the St. Petersburg international Economic Forum (SPIEF) in June. Saud met with President Putin during the international business conference too, RDIF said.

RDIF has attracted over $25 billion of foreign capital into the Russian economy through long-term strategic partnerships with leading sovereign and investment funds of the world, it said, entering into investment partnerships with China, India, Kuwait and Japan, among others.

Juncker: 'We will not reach a deal with Greece today'

• LIANNA BRINDED
 

• Jul. 7, 2015, 3:46 AM
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ReutersEuropean Commission President Jean-Claude Juncker gives a statement while standing in front a giant Greek flag projected in the press room at the EU commission headquarters in Brussels, Belgium June 29, 2015.

European Commission President Jean-Claude Juncker unleashed a number of home truths to Greece and its Prime Minister Alexis Tsipras on Tuesday, after the country overwhelmingly voted "No" – or "OXI" – in the country's bailout referendum Sunday.

He said there there will be no deal reached today and that all parties must discuss "what 'respecting Greek vote' means."

Tsipras is set to unveil new bailout proposals at an emergency meeting of eurozone leaders in Brussels on Tuesday. 

"The Greek Prime Minister knows that the question asked in the Greek vote was no longer valid. I'm against a Grexit but we must discuss what 'respecting the Greek vote' means," said Juncker in a speech Tuesday morning.

"I'm very saddened that the Greek delegation left the negotiating table — you don't do that in Europe. It was a big mistake. We must try and find a solution. It can't be done today — that would be to simplistic. Today we'll pave the way, through talks and mutual understanding, to put things in order. The ball lies in the Greek government's court."

Greeks had to vote either "Yes" or "No" to bailout conditions given to the government before June 30. However, the situation radically changed when Greece  defaulted on its €1.6 billion (£1.1 billion, $1.8 billion) payment to its creditors that day.

Now, a "No" vote means Greece is likely to default on almost all its remaining debt and run out of money because the European Central Bank will not lend the country anymore cash.

On July 6, in a research note entitled "Greece: Time for the Adults to Speak," BAML's analysts pretty much say the "No" vote was pointless, as all it did was make the country's economy worse.

That means Greece is even more desperate for cash than it was before the vote and therefore in a much weaker negotiating position. Greece has another payment due to the European Central Bank coming up later this month. ATMs are close to running dry.

On July 5, Barclays' analysts warned that this will mean Greece will run out of liquidity as of July 20, and therefore certainly default on its debt, maybe exit the EU, abandon the euro and therefore will re-adopt its old currency, the drachma and use IOUs to recapitalise its banking system.

I.O.U.S.A. - One Nation. Under Debt. In Stress. (Video)

I.O.U.S.A. - One Nation. Under Debt. In Stress.

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As the average American can attest, personal debt is bad enough, but as Thomas Jefferson once cautioned, public debt is corruptive of the government and demoralizing of the nation. Patrick Creadon's I.O.U.S.A.documents the efforts of two concerned citizens, former US Comptroller General Dave Walker and Concord Coalition Director Robert Bixby, to explain how America racked up over $9.5 trillion in debt and what we can do to stem the tide.

Based on the book Empire of Debt by William Bonner and Executive Producer Addison Wiggin, Wordplay's Creadon combines Walker and Bixby's Fiscal Wake-Up Tour with observations from former Federal Reserve Chairman Alan Greenspan, former Treasury Secretaries Robert Rubin and Paul O'Neill, superstar CEO Warren Buffett, and student activists.

The information flows with ease and the clips from Saturday Night Live and The Daily Show add levity to an undeniably dark and timely topic, but the narrative rests on a long list of facts and figures, leading to a production that feels more like a special news report than a work of cinema.

Unlike Alex Gibney's Enron,The Smartest Guy in the room, on which co-writer/producer Christine O'Malley (Creadon's wife) assisted, character development takes a backseat to data. Arguably, the director lacks an out-sized personality, like Enron's Kenneth Lay, around which to assemble his argument, but the subject calls for more of a human face to have the desired effect, i.e. to encourage beleaguered taxpayers to care enough to rise up off their easy-chairs and agitate for greater fiscal responsibility.

Canada posts second-largest trade deficit ever as exports slide

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Greg Quinn, Bloomberg
10:15 AM, E.T. | July 7, 2015
Economy

 

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Canada’s merchandise trade deficit widened to the second-largest on record in May, more evidence that weakness that started with an oil shock has extended beyond the first quarter.
The deficit widened to $3.34-billion from $2.99-billion in April and was second only to the record $3.57-billion shortfall in March, Statistics Canada said Tuesday in Ottawa. Exports fell for a fifth month.
The report adds to pressure on Bank of Canada Governor Stephen Poloz to cut interest rates next week for the second time this year, as an expected rebound in non-energy exports fails to materialize. The trade data and a jobs report later this week are the last major indicators before the central bank’s July 15 rate decision.
“The trade data were the first major indicator for May activity, and it ain’t lookin’ good,” Avery Shenfeld, chief economist at CIBC World Markets in Toronto, said in a research note. “That’s one more chip on the side of our forecast for a rate cut by the Bank of Canada next week.”
On Monday, Toronto-Dominion Bank Senior Economist Randall Bartlett said in a research note Canada probably fell into recession in the first half, due to the drop in oil prices. He also predicted Poloz will cut rates next week.
Canada’s dollar remained lower after the report, and was down 0.7 per cent to $1.2741 per U.S. dollar at 8:40 a.m. Toronto time.
Shrinking Economy
Exports fell by 0.6 per cent to $42-billion in May, and they declined 6.7 per cent from the same month a year earlier. Metal ore and non-metallic mineral shipments fell 9.2 per cent to $1.44-billion in May and exports of industrial machinery, equipment and parts declined 3.5 per cent to $2.56-billion. Forestry product exports fell 3.2 per cent to $3.07-billion.
May’s overall trade deficit exceeded the median estimate of $2.55-billion in a Bloomberg News economist survey with 18 responses.
Falling crude oil prices earlier this year led to cancelled investments and layoffs in Alberta and four straight contractions in national gross domestic product. Energy exports rose 1.3 per cent to $7.66-billion in May as oil prices stabilized, leaving them down 33.8 per cent over the past 12 months.
Imports rose 0.2 per cent to $45.3-billion, including a 2.3 per cent gain in consumer goods to $9.72-billion, Statistics Canada said.
Canada has posted trade deficits every month this year, and the cumulative 2015 total of $13.6-billion is a record, exceeding the next highest, in 2009, of $2.95-billion.
The volume of exports plunged 2.5 per cent in May while import volumes rose 0.3 per cent, Statistics Canada said. Volume figures adjust for price changes and can be a better indicator of how trade contributes to economic growth.
Poloz has said the shock of last year’s plunge in crude oil prices is “front loaded” and gains in other parts of the economy will take over in the second half of this year. On June 28 the central bank governor compared his January interest-rate cut to surgery made necessary by plunging oil prices.
–With assistance from Erik Hertzberg in Ottawa