7 Percent Drop Closes Chinese Stock Markets; U.S., World Markets Also Slump

January 4, 2016

China’s stock markets stumbled badly on the first day of trading in 2016, with a 7 percent plunge forcing a market shutdown. The trigger mechanism that cut the day short in Shanghai and Shenzhen was created in response to last year’s market crash, which brought trillions in losses.

Ripple effects from the Chinese plunge were felt around the world. Major markets in Europe dropped, with Germany’s DAX down more than 4 percent at one point Monday. In the U.S., the Dow Jones Industrial average fell more than 2 percent shortly after the opening bell.

NPR’s Frank Langfitt reports on the situation in China:

“The massive sell-off followed the release of data showing parts of the Chinese economy are continuing to contract. A private survey showed China’s factory activity shrank in December for the 10th month in a row. On Friday, a government survey showed a fifth month of contraction regarding larger, state-owned companies.

“China’s economy is still growing at a rate that would be the envy of most countries, but that growth has been slowing more rapidly than many anticipated.”

After Monday’s fall, the Shanghai Composite Index, which had soared to 5,178 points last June, now stands at 3,296. Compare that to the first day of trading in 2015, when it closed at 3,350.

Trading was halted before 2 p.m. local time. In addition to poor economic indicators, some analysts cite a rush to sell off stock after an initial drop, as investors feared the market might close early.

Also blamed for the volatility: the expiration this Friday of a six-month trading ban instituted after last summer’s free fall. That ban forbade large investors and insiders from selling their stakes in companies in an attempt to prop up the market. The ban applies to investors holding 5 percent or more of a company’s shares.

But the ban’s looming lapse is creating new worries. Hong Kong lawmaker Christopher Cheung Wah-fung, who represents brokers, tells the South China Morning Post, “Investors are worried about major shareholders selling when the ban expires this Friday, so they opted to sell in advance on Monday or over the next few days.”

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