A plunge in Chinese stocks rippled across global markets yesterday, triggering a massive wave of selling in the United States that sent the Dow Jones industrial average down 3.3 percent, or 416 points, its biggest decline since March 2003.
The news from Asia sparked the initial sell-off, but a confluence of other events, including news of rising real estate loan delinquencies, a surprisingly weak manufacturing report and a bombing near Vice President Cheney in Afghanistan, made an already difficult day worse.
For most of the morning the Dow declined steadily until it had fallen 300 points. Then, just before 3 p.m., it plummeted another 200 points before recovering slightly because of a trading glitch that led to a backlog of sell orders clearing at once. The Dow closed at 12,216.24. The Standard and Poor's 500-stock index, a broader measure of stock prices, also lost more than 3 percent by the close of the trading day, its biggest drop in 3 1/2 years.
Chinese markets did not participate in the continued sell-off Wednesday. Japan's Nikkei 225-stock index closed down 2.85 percent, at 17,604.12. In midday trading, the Hang Seng index had fallen 2.9 percent, to 19,568.54, but the Shanghai Composite index had climbed 1.6 percent, to 2817.12.
From currency markets to blue-chip companies to international stock exchanges, no sector was left unscathed yesterday. The day was reminiscent of when the Internet bubble burst several years ago -- traders and investors around the world stared at electronic boards and televisions showing markets falling deeper into the red.
Todd Leone, head of trading at Cowen & Co., saw "nothing but sellers," he said. "My whole screen is red. Every group is down."
Adding to the market's woes, former Federal Reserve chairman Alan Greenspan warned in a speech Monday that the U.S. economy might slip into recession by year's end. "It didn't help that Greenspan used the 'R-word,' " said Al Goldman, chief market strategist at A.G. Edwards. "People overreacted to that. He's still an icon."
Some analysts said, however, that it was about time for the market to cool after a breathless run-up in share prices.
"I don't think a one-day [sell-off] is going to do justice for what's been going on," said John O'Donoghue, co-head of equity trading at Cowen. "It wouldn't surprise me to see a total 5 percent correction and even more from here."
A major long-term concern among analysts is whether the heady days of "cheap debt" are coming to an end. The ability to borrow money at low rates and with favorable terms has fueled much of the world economy in the past few years, including the record-topping leveraged buyouts on Wall Street, the global run-up in real estate prices and the surge of investments in emerging markets overseas.
Signs surfaced yesterday that the easy availability of debt may be ending.
The mortgage company Freddie Mac announced tougher standards for its subprime mortgages, saying it would not buy such risky loans that are linked to a high number of delinquencies and defaults.
Moreover, investors fled emerging markets and took safe positions in the currencies of Japan and other countries where borrowing costs are among the lowest in the world. As emerging markets took it on the chin yesterday, the yen climbed 2.3 percent against the dollar, the most in nearly a year.
This occurred because investors sought to protect their money in case of a sustained downturn. In a growing global economy, these investors can take more risks and obtain higher returns by borrowing money and pouring it into emerging economies like China and India.
To many investors, yesterday's events were a stark demonstration of the vulnerabilities of the global economy, not just that of the United States. That a sell-off in China could have such serious reverberations around the world was noteworthy, said Joseph E. Stiglitz, a Nobel Prize winner and former chief economist at the World Bank.
"China has been the engine for global growth," Stiglitz said. "And a significant slowdown in China would have fundamental implications for commodity prices around the world. . . . Oil prices have been sustained by high Chinese demand. Just think of what would happen if there's a significant part of China that had a slowdown."
Analysts in China blamed yesterday's plunge, which at 9 percent was the largest single-day drop in a decade, on the news of a crackdown by the State Council, the Chinese cabinet, on illegal activities related to securities trading. According to a statement on the government's Web site, a special task force would be convened to provide recommendations for how to "repair" illegal securities activities.
On Wednesday morning, Chinese regulators denied rumors of plans for a 20 percent capital gains tax on stock investments, one factor that had sent markets lower.
China's stock markets began their surge upward in June 2006, after the government again allowed domestic initial public offerings after a long hiatus. There were a number of other securities milestones last year. The government took $200 billion of stock it owned and allowed it to be traded publicly. And several of the country's largest state-owned companies, including the Industrial and Commercial Bank of China, were dual-listed on the Shanghai and Hong Kong stock exchanges.
The Shanghai Stock Exchange rose 130 percent in 2006, and it was up 12 percent from Jan. 1 to mid-February. Just before the Chinese New Year holiday, the Shanghai Stock Exchange broke the 3,000-point mark for the first time.
Signs that China's two domestic stock markets, in Shanghai and Shenzhen, may be over-inflated began to show up in early February after Cheng Siwei, vice chairman of the Nation's People Congress, said publicly that he worried about a "bubble." The stock market fell 11 percent that week but quickly made up the losses and continued to hit new highs.
Then came China's Black Tuesday, which yesterday wiped out $100 billion of market value.
Feng Yu, a broker at China Galaxy Securities in the southeastern city of Ningbo, said he believed yesterday's drop was only a "technical correction" to make up for the unprecedented rise in recent months.
"At the beginning it was just banking stocks," Feng said. "Then it affected all shares," Feng said he believed the drop was precipitated by signals from the government that it wanted to slow down the explosive growth, which has prompted individual investors to line up for hours to open brokerage accounts.
Another piece of troubling news was released yesterday: The Commerce Department reported that durable-goods orders fell 7.8 percent in January, to a seasonally adjusted $204 billion. The decline, including in such large-order items as airplanes, semiconductors and appliances, surprised Wall Street, which had expected a 3.2 percent drop.
In Washington, the confluence of world economic events got the attention of the White House. "The president's economic advisers are paying attention to the markets," spokesman Tony Fratto said. "We continue to believe that the U.S. economy is sound."
The Federal Reserve, meanwhile, was silent, indicating that it did not view the market's drop as a threat to the abilities of U.S. financial firms to function.
This was in contrast to the Fed's response to the much sharper stock price declines of the October 1987 crash and after the Sept. 11, 2001, terrorist attacks, when the central bank issued statements reassuring the markets and investors that it would provide ample funds to the financial system to ensure transactions could be completed.
But analysts said Fed Chairman Ben S. Bernanke would probably be asked to comment on the global financial gyrations this morning when he is scheduled to testify before the House Budget Committee.