Global markets ended a dismal week with a whimper Friday, capping one of the worst starts to a trading year in history and exacerbating concerns that global economic turmoil will continue to rattle investors.
Much of the week’s turmoil originated in China, where authorities on Friday moved to stabilize the currency, bought shares and suspended a circuit-breaker system that fueled days of global financial panic.
As a degree of confidence trickled back to China, global markets also took heart from the Chinese government’s rescue act. In China, the CSI 300 index in Shanghai and Shenzhen closed 2 percent higher, recovering after an early decline. Gains were more modest in other Asian markets, and European exchanges held on to gains.
Still, because of earlier sell-offs, this will be one of the worst weeks in years for many markets.
The major U.S. indexes, including the Dow Jones industrial average and the Standard & Poor’s 500-stock index, were down 6 percent this week. The tech-heavy Nasdaq fell more than 7 percent this week.
“Given confidence in China’s ability to manage its . . . markets has been badly damaged, it is not surprising to see a comparatively muted global reaction,” Angus Nicholson, a markets analyst at IG Securities, wrote in a client note. “Markets will be waiting to see the Chinese government’s determination to prop up the stock market and the currency into next week before any major recovery is likely to be seen.”
The links between China’s stock market and its economy are very limited, experts say, and the ties to the global economy even more tenuous. That means the contagion effect from China’s meltdown should, in theory, have been more limited, many experts argue.
“People have been importing the panic from China into other markets, even though the financial linkages are really not that strong,” said Brian Jackson, China economist at IHS Global Insight. “The stock market might not do that well in the next few quarters, but it is not going to have a big impact on GDP right now.”
Chinese authorities were blamed for fueling panic by introducing a poorly designed circuit-breaker system that forced the stock market to close early twice this week.
On Thursday night, they announced the system would be suspended.
Thursday’s dramatic 7 percent fall in shares — in less than a half- hour of trading — was precipitated by a larger-than-expected devaluation in the Chinese currency. On Friday, the central bank fixed its guidance rate for the yuan higher for the first time in nine trading days, helping to calm the market.
The Reuters news agency reported that China’s foreign-exchange regulator ordered some banks to limit clients’ dollar purchases in a bid to stem capital outflows, while Bloomberg reported that government funds again entered the market to buy local stocks on Friday.
Regulators also prolonged rules limiting the amount of shares major shareholders can sell on the open market.
“The national team will continue to save the market, the mood of investors has stabilized, and confidence is restored,” said Li Daxiao, an analyst at Yingda Securities in Shenzhen.
But the policy flip-flopping did not impress many, with ridicule expressed on social media, frustration in the financial markets and confusion bordering on panic among many ordinary retail investors.
“The last four days were pretty terrifying. The half-hour yesterday was the most panicky,” said Wei Wei, an analyst at Huaxi Securities in Shanghai.
“Some investors even doubted if the market would still exist. It was a crisis,” she said. “The ups and downs of the stock market are normal. Investors understand that they depend on their own capabilities to make money. But when both being long and selling short disappeared, what game are we suppose to play?”
Last year’s unanticipated currency devaluation, a collapse in the stock market and a heavy-handed rescue program badly dented global confidence in the ability of China’s Communist Party leaders to manage a complex economy and powerful financial markets at a particularly challenging time, when growth is already slowing.
This week’s episode has not done confidence any good.
“Why do the policymakers keep making such stupid mistakes?” asked Bill Bishop in the influential Sinocism newsletter. “Were they never that competent but just looked smart because there was so much low-hanging fruit? Is China’s economy such a mess now that they have no good options left?”
Denyer reported from Beijing. Liu Liu and Xu Yangjingjing in Beijing contributed to this report.