Chinese stocks slumped 7% within 30 minutes last week triggering the second emergency market closure during the first week of 2016.
The Shanghai and Shenzhen stock exchange had to stop their trading. Although the People’s Bank of China spent US$20 billion to support the Yuan, China’s stock market continued its downfall, creating 2 automatic circuit breakers.
It was the first time that China’s stock market applied the circuit breaker mechanism.
China’s stock market plunge was attributed to the People’s Bank of China’s decision to reduce the exchange rate between the Yuan and the US dollar to its lowest level since April, 2011.
It was also the biggest devaluation of the Yuan since a similar move that shocked the world market in August, 2015. Signs of China’s slow economic growth have affected investors’ psychology.
Analysts say the Chinese government’s market intervention has been counterproductive and has created chaos. This intervention may have supported stock prices but failed to create solid assurances for investors.
Developments in the Chinese stock market have triggered share selling in Europe and America. Although the US Department of Labor reported on January 8 that by December, 2015, 292,000 new jobs had been created, this impressive figure failed to save Wall Street.
The Dow Jones and S&P 500 fell approximately 6%. This was the worst week of the US stock exchange in 4 years. The declining share value on the US stock market is partly due to instabilities in the Chinese stock market and the record low oil price in 12 years.
In Europe, the FTSE first 300 index declined 6.7% in the first week of the new year. British FTSE-100 lost 5.3%, French CAC 40 lost 6.5%, and German DAX 30 lost 8.3%. In Asia, Japan’s Nikkei 225 index fell 7%. Approximately US$2.5 trillion vaporized on the world stock market.
Economists say China’s economic difficulties and recessions in Brazil and Russia have affected global growth prospects. They forecast that during 2016 the world stock market will continue to be affected by increasing geo-political risks, the Democratic People's Republic of Korea (DPRK)’s claim of a successful nuclear bomb test, escalating tension in the Middle East, and Britain’s possible EU exit.