Chinese shares experienced their worst ever start to a year after Chinese stock markets plunged 7% in their opening session of 2016 on Monday.
It began with an initial halt of CSI-300 Futures (Chinese Securities Index) for 15-minutes at a 5 percent level, a move that failed to stop the retreat. When the market re-opened following the temporary suspension, shares began extending their losses. As the stock market tumbled to 7%, China’s new “circuit breaker” measures were triggered, a mechanism enforced by the securities regulator to automatically prevent further volatility and losses in the stock market.
At 1:34 PM local time, trading was halted across the board in the world’s second-largest stock market.
Reasons for the Plunge
Factors such as the falling yuan, diminishing activity in a robust factory-intensive manufacturing economy have been cited as reasons for the 7.02 percent plunge which saw the market suspended for the rest of the day. The CSI-300 compromises of companies listed in Shanghai and Shenzhen.
The Guardian reports a private survey revealed early on Monday that did not make for good reading for those who hoped the manufacturing economy will start the new year on a better footing. The private survey showed China’s factor activity contracted for the 10th straight month in December. Meanwhile, an official survey that focuses on bigger, state-owned firms showed a fifth month of contraction, during its revelation on Friday.
Another important factor was the dumping of stocks by investors who anticipated the end of a ban on share sales imposed last summer. The share sales ban was enforced by Chinese policy makers who – in order to support stock prices – came up with the drastic measure to ban the sale of shares by shareholders with stocks more than 5% to halt a plunge in stock prices. Estimates by Goldman Sachs note that the sales ban is likely to have kept some $185 billion of shares off the market.
The 6-month ban is speculated to expire at the end of the week and will allow shareholders to sell their shares again. However, the China Securities Regulatory Commission (CSRC) hasn’t confirmed when the ban will be lifted just yet.
The slump is likely to have spurred on selling that eventually triggered the circuit breaker mechanism, bringing in further panic.
Increasing Bitcoin Adoption
The People’s Bank of China, the country’s central bank recently cut its benchmark lending and deposit rates while lowering the minimum ceiling of mandatory cash reserves for banks as measures to improve a stuttering economy. Manufacturing numbers are going down. Inflation is being predominantly attributed to increasing food prices. The Chinese Yuan is depreciating in value. The offshore Yuan is also looking at a similar falling trajectory.
All of the above factors are likely to contribute to an increased effort among investors to diversify and bitcoin adoption is already popular in China, a country that accounts for 80% of the global trading volume of bitcoin. Fears of the Yuan facing devaluation have already resulted in increased Bitcoin trading in the recent times. Although exchanges aren’t reporting a spike in BTC trading at the time of publishing, a possible increase in trading and price of Bitcoin will be noteworthy as a result of the crashing Chinese stock market.
Despite Bitcoin’s known price volatility, the cryptocurrency has seen a tremendous year in 2015, one marked with price swings, regulatory challenges, increasing adoption and further validation. Mainstream news outlets deemed the cryptocurrency as the ‘best-performing’ currency of the year, beating the U.S. dollar.
Featured image from Shutterstock. Chart from Yahoo.