A number of global stock markets fell sharply following the suspension of the Chinese stock market’s trading. There have been worries of the Chinese economy’s slowdown in growth for several months now, and the latest move by Chinese officials to interrupt trading has only intensified them.
The Chinese authorities took the decision of suspending Thursday’s trading after a sharp reduction
of the nation’s main index. In its attempt to reduce volatility, China introduced its new stock market circuit-breaker mechanism since the beginning of this year which is designed to suspend trading in case the main Chinese stock markets decrease by more than 7%. And even though it has been active for only four daily trading sessions, it has been triggered during the first hour of the Chinese trading session on Thursday. Chinese regulators have already decided to suspend the circuit-breaker mechanism, probably because it doesn’t provide the policymakers any confidence on efficiently regulating the stock market.
The latest unrest of the Chinese markets renewed investors’ nervousness on whether global markets can continue recovering. There is no direct impact on global markets as foreign investment in the Chinese stock market is actually less than 5%. What really causes the unrest is the continuous evidence of an economic slowdown in China and whether the economy is moving towards a hard landing. Given that it is now the world’s second largest economy, and the second largest importer of goods and commercial services, it is unavoidable that its performance affects the rest of the financial markets.
China is accountable of almost a fifth of the global economic activity and therefore a reduction in spending has a major impact on the world’s markets. Exporters of goods and commercial services to China have already received blows after the fall of commodities’ prices including crude oil, copper, and gold. The People’s Bank of China has been devaluating the yuan since last year, and this has been interpreted by investors as a sign of a slowing economy and the devaluations as a measure to increase exports.
European and U.S. stock markets reacted heavily to the suspension of the Chinese market’s trading. UK’s FTSE 100 on Thursday fell by 2.8%, while the DAX 30 and CAC 40 also decreased by 3.5% and 2.7% respectively. During the New York session that followed on Thursday, U.S. stock markets also fell, the Dow Jones slipped by 2.6% to 16,431 points and the S&P 500 by 2.7& to 1,935.64 points.
Together with stock markets, a number of currency markets have been affected after a generally rough week, including the GBP/USD which fell by 1.5%. This will be an important week for the sterling and its performance is likely to depend on the outcome of the Bank of England (BOE) interest rate decision, due on Thursday 14 January at 12:00 GMT. Although the BOE is anticipated to keep interest rates the same, the meeting minutes might provide some valuable information on the likelihood and timing of a rate hike.
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