On the first day of trading in 2016, China lived up to its reputation as a “shock to watch” in the new year, as a nearly 7% stock plunge in Shanghai revived bad memories of last summer’s China-inspired stock swoon. That drop, in August, led to Wall Street’s first official price correction in four years.
Investors around the world were spooked once again Monday by more evidence of slowing growth in China. The rout in Chinese shares, the biggest one-day selloff in mainland China since late August, tripped new automatic trading halts, or so-called “circuit breakers,” designed to give markets a chance to cool off when stocks are falling fast. Chinese authorities eventually suspended trading for the day before the normal closing time.
The losses spread to Europe, where a broad stock gauge was down almost 2.5%, and then traveled to Wall Street, where the Dow Jones industrial average at one point was down more than 460 points, and on track for its worst one-day point decline since a nearly 470-point drop on Sept. 1. The Dow’s drop was exacerbated by heightened tensions involving Iran and Saudi Arabia, as well as investors still adjusting to the idea of coming interest rate hikes from the Federal Reserve this year at a time when the U.S. stocks are trading above their historical values and U.S. manufacturing in December is running at its slowest pace since June 2009.
“The fall brings back dark memories of the collapses experienced last summer,” said Paul Hickey, co-founder of Bespoke Investment Group, in a report. China’s plunge and its infection of other world markets are a replay of some of Wall Street’s major lowlights in 2015, when worries about an economic hard landing and Beijing’s surprise devaluation of its currency, the yuan, in August sent shock waves through global markets.
Chinese authorities took a number of steps in the summer of 2015 to curb volatility, reduce speculation and lessen the downside price momentum. Steps included suspending initial public offerings to reduce the supply of stock for sale, restricting big investors and corporate insiders from selling shares, and limiting the trading behavior of so-called short-sellers, or traders that sell borrowed shares with the hope of buying them back at lower prices.