Chinese stocks took a major plunge that has not been seen since February 2007 under rapid selling, as Beijing’s measures to instil investor confidence and stabilize the market subside.

 

The Shanghai Composite Index fell by 8.5% to 3,725.56 by the end of the day. Shanghai’s major sell off impacted the Shenzhen Composite, which dropped by 7%, and the ChiNext start-up board also sank 7.4%. Hong Kong benchmark index slumped by 4.2% and Japanese indexes were negatively impacted by China’s retreat. This is the second time in weeks that the Shanghai market has plummetted to historic lows. 

 

PetroChina Co. sunk to a record of 9.6%, and other raw material and financial stocks also dropped with Bank of Communications, China Shenhua Energy, and China Life Insurance each hitting their daily of 10%. All major Chinese banks saw major decreases in their share prices, with ICBC, the world’s largest bank by asset size, sinking by 5.3%.

 

 

The rapid sell-off today in Chinese markets demonstrates the lack of faith in China’s unprecedented intervention to superficially prop markets.

In late June, the People’s Bank of China slashed interest rates and then rapidly followed the move by injecting liquidity to support the market.

 

In more controversial moves, authorities restricted initial public offerings, and called on owners to not to sell shares and launched an investigation into alleged malicious short selling scheme. Chinese authorities also suspended trading in more than 1,400 stocks while the insurance regulator let insurers use more of their premium income to purchase shares. Furthermore, new obstacles to short selling of index futures were implemented.

 

China’s efforts seemed to have created positive results as the marketed appeared to stabilize and with share prices rising up to 16% by early July. But international investors and institutions have passionately argued that China should avoid intervening in its markets, and let the market play out the way it should, including The International Monetary Fund, which has urged China to stop its support measures for its financial markets.

 

China’s economy has been slowing down at rapid speeds, seeing its 10% GDP per year drop down to the low sevens, increasing the concerns about the stability and growth prospects for the country’s financial markets. Last Friday China’s statistics bureau released data that showed that the private manufacturing gauge declined in July to a 15 month low, perplexing analysts.

 

 

Justin Pyvis, an economist for Asianomics Group Macro product team, told The Asset that investors should be concerned about China, as the country has deep and sophisticated structural problems that need be fixed before Chinese markets can perform and correct themselves like developed markets.

 

“Today's collapse and the recent volatility in the SSE are but a symptom of some much larger problems in China. Those problems are the structural misallocations plaguing its economy, such as its bankrupt municipalities and heavily indebted corporates to its numerous ghost cities,” says Pyvis.

 

“Investors are right to be cautious about trusting anything that the government is so obviously manipulating, from its official statistics to stock prices,” Pyvis adds.

 

 

Despite the fact that Beijing has implemented measures to virtually set a floor for the country’s stock market, investors are still not confident in the prospects of the Chinese market. This may cause the Chinese government to take more action, but it may not be enough to restore confidence in the market. Pyvis says, “The PBOC and Beijing may well take additional steps to ‘stabilize" the market, but that will only serve to further obfuscate the situation, leaving investors even more concerned about the true state of the Chinese economy than they were before.”

 

According to Xia Le, chief economist for Asia, the government intervention is not the silver bullet for the problem, but there are still options that the government can take if it decides to reattempt to prop the markets.

 

“Investors are not unimpressed by the government’s interventions. It seems that they have got used to the authorities interventions and even has grown immune to them. The herd behaviors of investors, in particular the retail investors now appear again irrespective of the government interventions,” says Le.