BEIJING — A collapse in China’s ailing stock market spread like contagion across the globe again Thursday, pummeling nervous investors looking for respite from the week’s rocky trading.
Chinese stocks traded for less than 30 minutes, slumping 7 percent and triggering the second emergency market closure this week. The action prompted markets in Europe to retreat and then spread to the United States, where stocks tumbled 2 percent.
The Dow Jones industrial average, which tracks 30 blue-chip stocks, and the Standard & Poor’s 500, a broader measure of the market, both fell about 2.3 percent. They have lost about 5 percent of their value the week so far.
The tech-heavy Nasdaq suffered the deepest losses, falling 3 percent on Thursday. It is down about 6 percent this week and on pace to enter a what’s known as a correction, meaning the index will have fallen about 10 percent from its most recent high.
The sell-off was widespread, even hitting tech giants Apple and Amazon, which were down 4 percent and 3.7 percent respectively. JPMorgan Chase slid 4 percent, while Nordstrom tumbled 5.5 percent.
Against a backdrop of a weak economy and, some argue, an overvalued currency, confidence in China had long been in short supply. But investors also blamed the panic here on ill-considered and poorly explained moves by the authorities this week.
Market confidence was dented early Thursday by a sharp devaluation in the Chinese currency, which was interpreted as a sign that the authorities are becoming increasingly rattled about the nation’s ailing economy.
Weak economic data had sent share prices plunging precipitously Monday, and government intervention to prop up the market by buying shares the following day did little to restore investor confidence.
“The bottom line is the market is not supported by fundamentals,” said Andy Xie, an independent economist based in Shanghai. “People in the know want to get out.”
The CSI 300 index of companies listed in Shanghai and Shenzhen fell 7.2 percent in morning trading, triggering a halt in trading for the remainder of the day. In Tokyo, the Nikkei 225 index fell 2.3 percent, its fourth straight daily fall, to record its worst start to a year since 2000. The MSCI index of Asian shares excluding Japan fell 2.2 percent to a three-month low.
Influential investor George Soros said that China had a “major adjustment problem” on its hands. “I would say it amounts to a crisis,” he told an economic forum in Sri Lanka, according to Bloomberg News. “When I look at the financial markets, there is a serious challenge which reminds me of the crisis we had in 2008.”
For U.S. investors, the turbulence continues an inauspicious start to a year many market watchers have already predicted will be rocky. On Monday, stocks tumbled more than 3 percent before recovering, then declined again on Wednesday. By Thursday, the first week of 2016 was on pace for the weakest yearly openings in decades.
The market tumult also comes as the Federal Reserve has begun to remove some of its support of the U.S. economy. On Wednesday, Fed documents indicated the central bank is likely to move cautiously as it looks toward continuing to raise rates. Those efforts could be derailed if a troubled global economy weighs on U.S. markets, analysts have said.
The fallout from China’s slowing economy is likely to be felt more deeply in Europe than in the United States, which is less dependent on China’s economy, according to analysts. Still, the market turmoil is a reminder of how interconnected the United States is to the global economy.
“Step one is don’t panic,” said Mike Bailey, director of research at FBB Capital Partners, though he noted that U.S. stocks could fall even further before finding a bottom.
“As the Chinese markets go down, there will be a steady bleed to other markets,” he said. “It will be hard for U.S. and other markets to rally back as long as China continues to go down.”
In an attempt to shore up investor sentiment, China’s securities regulators issued new rules Thursday to prolong restrictions on share sales by major shareholders. The move could help slow selling but was unlikely to stem it, experts said.
On Thursday, the People’s Bank of China surprised the markets by setting the yuan’s official midpoint rate at 6.5646 to the dollar, about 0.5 percent weaker than the day before and the lowest rate since March 2011. That has reignited fears that China wants to devalue its currency to stimulate exports, and this could provoke other countries to follow suit.
“The largest one-day weakening in the Chinese yuan midpoint since August has put China devaluation concerns and a global deflationary crisis front-and-center in investors’ minds,” Angus Nicholson, a markets strategist at IG Securities in Melbourne, Australia, wrote in a note to clients. “The efficacy of China’s new equity ‘circuit-breakers’ has also been greatly called into question, and their days are looking numbered.”
China’s CSI 300 had traded for only 14 minutes before the first circuit breaker kicked in, calling a 15-minute halt to trading after a 5 percent fall. But instead of calming the market, it caused only more panic. When trading reopened, prices soon fell further, triggering a halt for the rest of the day.
“The circuit-breaker mechanism is only accelerating and escalating the panic in the market,” said Wu Xianfeng, president of Longteng Asset Management, in Shenzhen. Wu agreed with Xie that the market was overvalued, that major shareholders wanted to sell and that the trend was not going to improve. But the circuit-breaker mechanism was not helping, he said.
The market is so volatile it can easily fall 2 or 3 percent in an instant, he explained. When it does, everyone starts to panic that the circuit breakers will soon kick in and that traders won’t be allowed to close out their positions — so they rush to sell while they still can.
Adding to the sense of gloom was news that China’s foreign exchange reserves, the world’s largest, posted their biggest annual drop on record in 2015. Foreign exchange reserves fell $512.66 billion last year to $3.33 trillion, central bank data showed on Thursday, with a sharp drop of more than $100 billion last month alone.
The drawdown in reserves was evidence of the extent of the central bank’s efforts to shore up the currency and of heightened concerns about capital outflows.
The circuit-breaker system came into effect only at the beginning of this year but already has been triggered twice.
Deng Ge, spokesman for the China Securities Regulatory Commission (CSRC) had defended the system Tuesday, saying it had helped provide a “cooling off period” the previous day.
But by Thursday evening, China’s regulator announced it would suspend the circuit breaker system starting Friday, after it failed to achieve its aim of helping to stabilize the market.
“Currently, the negative effects of the mechanism are larger than positive effects,” Deng Ge said in a statement carried on state media. “Thus, the China Securities Regulatory Commission decides to suspend the circuit breaker mechanism to maintain market stability.”
Wu, the Longteng Asset Management president, who had earlier been sharply critical of the mechanism, welcomed the decision as a “positive move.”
“The development of an emerging market is a process,” he said. “Policy makers can test various policies, but if they find one is incorrect, they must have the courage to correct the mistake.”
“Tomorrow I will look for opportunities to buy more shares.”
On Thursday, the CSRC also tried to restore confidence by announcing that major investors would be permitted to sell no more than 1 percent of a company’s shares on the open market every three months. The rule, which comes into effect Saturday, replaces an existing six-month ban on any secondary market sales that was due to expire Friday. It does not mean state funds will exit from the market, and there will be no change to their role in stabilizing share prices, the regulator added.
“The new rules will help form stable market expectations and defuse panic sentiment,” the CSRC said in a statement. “The implementation of the new rules will not lead to waves of selling, and there’s no basis that they will lead to sharp declines in the stock market.”
At Renmin University of China, Zhao Xijun, deputy dean of the School of Finance, said the move would remove one of the uncertainties that had plagued sentiment this week and would play a “positive role in restoring investor confidence.”
But Xie, the independent economist based in Shanghai, said the move would not change the fundamentals that lay behind the market’s fall.
“It doesn’t matter how government acts to save the stock market, the market is still going to keep falling,” he said.
“Major shareholders are all hidden. They won’t reveal that they are major shareholders. All these policies are just taking in retail investors, and they won’t work.”
Last year’s currency devaluation, stock market collapse and subsequent heavy-handed attempts to prop up share prices dented global confidence in the competence of China’s economic managers, especially in their ability to manage sophisticated financial markets. This week’s events prompted a fresh volley of criticism.
Some investors argued that the government’s attempts to buy shares were only encouraging investors to bet against them, while others said measures to prevent shareholders selling shares were just undermining confidence further.
“This is crazy,” Alberto Forchielli, a founder of Mandarin Capital Partners, told Reuters. “Chinese regulators set off on this path in July, and they cannot get out of it. They have ruined whatever hope investors still had in the market.”
Foreign exchange traders were barely happier. “China isn’t communicating its policy intentions in a clear manner,” Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada, in Hong Kong, told Bloomberg News. “It’s disappointing that their communication policy is less than transparent.”
Now the risk of China’s woes spreading across the globe has resurfaced.
“It’s like a replay of the same things that moved the markets in August,” Benjamin Dunn, president of Alpha Theory Advisers, told Bloomberg News. “We’re perhaps getting confirmation that China is as bad as people think. We’ve lost the tail winds from the Fed and investor enthusiasm, and this adds to the mosaic of fear that’s out there right now.”
The World Bank cut its global growth forecasts for this year and 2017 on Wednesday, citing concerns over China’s economy and its effect on commodities. Falling oil prices are also undermining investor confidence and fueling fears of disinflation.
But amid all the talk of crisis and panic, some experts took a more sanguine view.
At Lombard Street Research in London, senior economist Richard Batley said the market should have been expecting a yuan devaluation, after the central bank said last month it would be targeting the yuan’s value against a basket of currencies. Against that basket, the yuan appreciated by more than 3 percent last year and is overvalued, he said.
“So yuan weakness against the dollar should not be seen as evidence of weakening Chinese growth,” he said, “but of the global economy returning to a sustainable equilibrium.”
At Capital Economics, Mark Williams said that big moves in China equities may grab the headlines, but they don’t have much effect on the Chinese economy or on economies elsewhere.
“Retail spending actually accelerated in the aftermath of the equity implosion last year,” he said. “Global investors usually overreact to bad news from China’s equity markets, so falls in Shanghai cause waves elsewhere. But a fall in Shanghai equity prices tells us next to nothing about the outlook for corporate earnings, even in China, so it shouldn’t have a lasting impact on share prices in the U.S. or Europe.”
Gu Jinglu and Liu Liu contributed to this report. Merle reported from New York.