Jul 27, 2015

TSX and NYSE open lower after Shanghai stock exchange falls 8%

A man looks down in disgust as electric board displays stock prices at a brokerage house in Hangzhou in east China's Zhejiang province on Monday. (Chinatopix via Associated Press)

North American stock markets opened lower on Monday after China's main stock index lost eight per cent in its worst one-day performance since 2007.

The Shanghai share index suffered a renewed sell-off despite government efforts to calm the market, ending down 8.5 per cent at 3,725.56 with most of the plunge occurring in the last hour of trading. Other stock benchmarks around the world were also lower.

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By mid-morning the TSX was down 0.8 per cent to 14,070, its lowest level this year. The New York Stock Exchange performed similarly, with the Dow Jones Industrial Average down 82 points at opening to 17,487.

Monday's fall on the Shanghai market was the biggest one-day decline in Chinese stocks since an 8.8 per cent plunge on Feb. 27, 2007, according to financial data provider FactSet.

Some analysts said the dive was sparked by brokerages restricting credit used to finance stock purchases, also known as margin trading. Chinese authorities took aggressive steps to stabilize the market after it tumbled last month, wiping away about $3.2 trillion in market capitalization. But analysts have been skeptical that such gravity-defying efforts could be sustained.

Dramatic slide

"The continuous check on margin trading by security companies has triggered today's sell-off," said Xu Xiaoyu, a market strategist at China Investment Securities. "In addition, the recent economic data shows it still takes time for the economy to recover from its sluggishness."

The dramatic 30 per cent slide in Chinese shares in June came after a sizzling yearlong rally took the market to multi-year highs even as the world's second-biggest economy slowed.

A period of stability was achieved after the government announced draconian support measures earlier this month that included forbidding major shareholders from selling any of their shares and ordering state companies and others to buy. Many companies also voluntarily suspended trading in their stocks on the Shanghai exchange and its smaller counterpart in Shenzhen.

Yating Xu, an economist at IHS Global Insight, said Beijing will likely feel renewed pressure to take more measures to put a floor under the stock market.

Markets rattled

The Shanghai benchmark had risen about 150 per cent by the time it peaked in early June. The gains were originally fired by commentary in state media that called the stock market undervalued. That led investors to believe the government would ensure that stock prices gained. Many small investors jumped into the market near its peak and are now sitting on significant losses.

The Chinese sell-off rattled other markets in Asia. Hong Kong's Hang Seng shed 3.1 per cent at 24,288.54 and Japan's Nikkei 225 dropped 1 per cent to 20,350.10. South Korea's Kospi fell 0.4 per cent to close at 2,038.81. Stocks in Southeast Asia were lower. But Australia's S&P/ASX 200 gained 0.4 per cent to 5,589.90.

Asian stocks had already started the week on a dour note, rattled by a last week's report on Chinese manufacturing that sparked a sell-off in gold as well as copper and other commodities.

Prices of copper and gold hit their lowest levels in several years following the survey that showed China's manufacturing contracted in July. On Monday, the price of gold bounced back from a five-year low but other metal prices lost more ground.

A drop in China's industrial profits has also added to signs that stimulus efforts are taking time to take hold in the world's No. 2 economy.

The National Bureau of Statistics said China's industrial profits contracted 0.3 per cent in June over a year earlier, marking a second straight month of decline.