World could face months of China market aftershocks

Beijing - Investor anxiety over economic weakness and a possible glut of unwanted shares flooding the market have complicated Beijing's efforts to withdraw emergency controls imposed after Chinese stock prices collapsed in June.

The latest trigger was currency jitters, but Thursday's plunge in Chinese stocks was just one in a series of aftershocks from last year's boom and bust that could shake markets for months to come.
Investor anxiety over economic weakness and a possible glut of unwanted shares flooding the market have complicated Beijing's efforts to withdraw emergency controls imposed after Chinese stock prices collapsed in June.
On Thursday, trading halted for the day after a stock index fell seven per cent a half-hour into the trading day. It was this week's second daylong suspension after a plunge in prices on Monday tripped the same 'circuit breakers' that were introduced January 1.
The benchmark Shanghai Composite Index more than doubled between late 2014 and June, then dived 30 per cent. Supported by a multibillion-dollar government intervention, the market rose almost 25 per cent in the final months of 2015, only to collapse in the new year. That left the main index down 15 per cent from its December peak.
Wild price swings could continue through the first half of this year, according to financial analysts. Even after the latest declines, the Shanghai index is up 36 per cent from October 2014. The turmoil in China triggered a sell-off in Asian and Western stocks. Beijing keeps its markets sealed off from global capital flows, but due to the vast size of China's economy, foreign investors watch them closely and react to volatility.
"The market still is trying to find a bottom, and that takes time," said Chen Yong, a strategist at Lianxun Securities. "The key is to be able to resume normal daily trading, and during that time volatility is inevitable."
Investors also were skittish about the impending end on Thursday of a six-month ban on share sales by any stockholder who owns more than five per cent of a company, according to Zhang.
Regulators tried to head off such concern by announcing earlier in the week major shareholders could sell only in private transactions to avoid flooding the market. After Thursday's market plunge, the securities agency tightened that restriction by saying they can unload only the equivalent of one per cent of a company's shares over the next three months.
"Additional volatility in China's stock market remains almost certain in the first half of 2016," said economist Brian Jackson of IHS Global Insight in a report. "China's stock market reform will remain a messy affair."
Chinese leaders encouraged novice investors to pile into stocks beginning in late 2014. They wanted to raise money for state companies to pay down heavy debt loads and become profit-oriented and competitive. Communist planners also hoped investing would help families save for retirement, easing the pressure on Beijing to pay for pensions and health care.
Those plans went wrong when markets soared faster than Beijing wanted. By May, state media that cheered on higher prices started to mix in appeals for investors to act prudently.
After prices plunged in June, the government banned sales by big shareholders, ordered state companies to buy stock, cut interest rates and canceled initial public offerings. The government has yet to say what its intervention cost, but Goldman Sachs has estimated state entities spent 860 billion-900 billion yuan ($135 billion-$140 billion) to buy shares in June and July.
The 'circuit breakers' might be adding to volatility instead of dampening it as similar measures do in Japan, Thailand and other Asian markets, economists said. They said the five per cent gain or loss in the CSI 300 index that triggers a 15-minute trading suspension and the seven per cent margin that ends trading for the day might be too low a threshold.
According to Jackson, the mechanism would have been tripped 20 times if it had been in place in the final quarter of 2015.
"It's hard to see how the circuit breakers can remain in their current form," said Aw.