China's Shanghai Composite index shed
8.5% on Monday, a bone-rattling decline that raises questions about the
government's ability to prevent a crash.
Beijing managed to stabilize markets with
a dramatic rescue in late June and early July, intervening in a number of ways
to limit losses for investors.
But the rout has
now resumed: Monday's slump was the biggest daily percentage decline since
2007.
The vast majority
of companies listed in Shanghai, including many large state-owned firms, fell
by the maximum daily limit of 10%. Losses in Shanghai, and on the smaller
Shenzhen Composite index, accelerated into the close. Shenzhen, which is heavy
on tech stocks, closed down 7%.
Investors are
worried about a possible withdrawal of stock market support by Beijing, and
signs of a sharper slowdown in China's economy.
Industrial profit
data released Monday indicate that factories in the world's second-largest
economy are losing momentum. Profits dropped 0.3% in June, compared to the same
period last year, the government said.
On Friday, an
early measure of China's manufacturing activity for July came in below analyst
expectations. The reading was the lowest in 15 months.
China's stock
markets have been extremely volatile this year.
The first signs of
trouble came in June, after the Shanghai Composite peaked at more than 5,100
points, a gain of roughly 150% over the previous 12 months. When the bubble
burst, the index lost 32% of its value in just 18 trading sessions.
Beijing reacted forcefully. The People's
Bank of China cut interest rates to a record low, regulators suspended new
market listings, and threatened to throw short sellers in jail.
The country's
market regulator, the China Securities Regulatory Commission, organized the
purchase of shares using cash supplied by the central bank. Companies were
allowed to suspend their own shares -- at one point 50% of all listed stocks
were frozen.
Following the
intervention, markets enjoyed two weeks of relative calm before Monday's
trading session.
Yating Xu, an
economist at IHS Global Insight, said the severe stock market decline could
pile more pressure on company profits in the months ahead, requiring further
intervention by the government to support growth.
"Poor profit
growth indicates persistent weak domestic demand in China, and adds pressure in
reaching some kind of stabilization in the second half [of 2015]," Xu
said.
"More
targeted stimulus, especially fiscal policy, may still be expected to support
China's infrastructure investments in the coming months."
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