The 2.6% drop in the Shanghai Composite Index, the biggest drop since November 27, looks like it was triggered worries by about the end of a six-month ban on stock sales by shareholders with stakes of 5% or more.
Why the shift in market reaction? One possibility is that it’s arbitrary and a reflection of a trendless market. On the other hand, there’s the possibility that it shows an increasing skepticism about the power of central banks (and governments) to guide economies to higher growth.
Yesterday and today, I think it was the impending holiday closure that prevented really, really bad news on the Chinese economy from turning into another selling spree. The official Purchasing Managers Index for the manufacturing sector fell to 49.7 in August from 50 in July. Any reading below 50 indicates that the sector or the economy is contracting. The August read of 49.7 is the first time the index has been below 50 since February
Today it’s clear that that the government’s new policy of no direct purchases really means no direct buying for most of the day and then direct buying of shares of only the biggest companies on the Shanghai exchange in the last hour or two of trading.
A week after China’s financial market regulators sent the Shanghai and Shenzhen markets tumbling by announcing that they were ending their direct buying of shares on those exchanges, and days after those same regulators sent shares climbing again by announcing that they would reverse that decision and resume direct purchases, today the Chinese government has indeed decided to end direct share purchases.
Even at their most optimistic today, U.S. markets weren’t totally convinced that Shanghai and Shenzhen wouldn’t do something “nutty” when they open tomorrow (tonight New York time.) Apparently at the end of trading today New York investors decided that the risk of a negative Chinese reaction was just too great and they sold “just in case.”
So much for calm. Today, August 18, volatility returned with a vengeance led by a plunge in China’s mainland stock markets. The Shanghai Composite Index dropped 6.15% overnight.
The Shanghai market, which fell 8.5% yesterday, started today with a 5.1% drop before recovering to close down just 1.68%. So, yes, Shanghai stocks did do better than they did in yesterday’s historic rout and they did rally from an early morning performance that had all the feel of a continuation of yesterday’s panic. But “recovery”?
What seems to have pushed the markets from profit taking to panic? Speculation that the Chinese government was about to reduce cash support for equity markets. Some traders decided that the China government had targeted 3,800 (or was it a nice round 4,000?) on the Shanghai Composite as sufficient to permit a reduction in government cash
