Chinese Stock Market

7 Percent Crash Causes Emergency Shutdown Of Stock Markets In China For The 2nd Time In 4 Days

Panic ButtonDid you see what just happened in China?  For the second time in four days, a massive stock market crash has caused an emergency shutdown of the markets in China.  On both Monday and Thursday, trading was suspended for 15 minutes when the CSI 300 fell 5 percent, and on both days the total decline very rapidly escalated to 7 percent once trading was reopened.  Once a 7 percent drop happens, trading is automatically suspended for the rest of the day.  I guess that is one way to keep the stock market from crashing – you just don’t let anyone trade.  And of course the panic in China is causing other markets to go haywire as well.  As I write this, the Nikkei is down 324 points and Hong Kong is down 572 points.

The amazing thing is that trading was only open in China for about 15 total minutes tonight.  Here is how CNBC described what just happened…

China’s stocks were suspended from all trade on Thursday after the CSI300 tumbled more than 7 percent in early trade, triggering the market’s circuit breaker for a second time this week.

That drop-kicked stock markets across Asia, which were already wallowing after a weaker open amid concerns over China’s economic slowdown and its depreciating currency as well as falling oil prices.

On the mainland, the Shanghai Composite tumbled 7.32 percent by at the time of the halt, while the Shenzhen Composite plummeted 8.34 percent. The CSI300, the benchmark index against which China’s new circuit breakers are set, plunged 7.21 percent. If that index rises or falls 5 percent, the market halts all trade for 15 minutes. If it moves 7 percent, trading will be suspended for the rest of the day. In total Thursday, China shares only traded around 15 minutes.

How will European and U.S. markets respond to the chaos in Asia when they open?

That is a very good question.  I think that everybody will be watching.

Already, the Dow Jones Industrial Average is down about 500 points for the year.  The financial crisis that began in the second half of 2015 is now accelerating as we enter 2016, and nobody is quite sure what is going to happen next.

One key to watch is what happens with the S&P 500.

2000 is kind of like a giant line in the sand on the S&P 500.  On Wednesday we saw the market hover around that psychologically-important number, and there is a whole lot of resistance right there.  If we break solidly through 2000 and start plunging toward 1900, that is going to break things wide open.

The primary reason for the stock market crash in China on Thursday was another stunning devaluation of the yuan.  This explanation from Zero Hedge is very helpful…

Following the collapse of offshore Yuan to 5 year lows and decompression to record spreads to onshore Yuan, The PBOC has stepped in and dramatically devalued the Yuan fix by 0.5% to 6.5646. This is the biggest devaluation since the August collapse. Offshore Yuan has erased what modest bounce gains it achieved intraday and is heading significantly lower once again. Dow futures are down 100 points on the news.

PBOC fixes Yuan at its weakest since March 2011… with the biggest devaluation since August

Yuan Devaluation

A massive devaluation of the yuan was also one of the primary reasons for the market turmoil that we saw back in August.  The Chinese are playing games with their currency, and this is causing havoc in the global marketplace.

Meanwhile, we have received some other very troubling news about the global economy over the past few days…

-The price of oil continues to collapse.  As I write this, the price of U.S. oil is down to $33.26 a barrel.  Those that follow my writing regularly already know that this is a really bad sign for the global economy.

-The Baltic Dry Index just hit another brand new all-time record low.  Global trade is absolutely imploding, and this is having a devastating impact on China and other major exporting nations.

-U.S. manufacturing is contracting at the fastest pace that we have seen since the last recession.  This is precisely what we would expect to see during the early stages of a new crisis.

-U.S. manufacturing imports are also contracting at the fastest pace that we have seen since the last recession.  It appears that “the almighty U.S. consumer” is not going to save the global economy after all.

In 2015, trillions of dollars of stock market wealth was wiped out globally.  Now this new global financial crisis is picking up speed, and many of the “experts” seem absolutely stunned by what is happening.

But most of my readers are not surprised.  That is because I have been breaking down the signs that have been warning us of this new crisis in excruciating detail for months.  The financial carnage that we have witnessed around the globe this week is simply a logical progression of what has already been happening.

To be honest, though, even I have been stunned by what has happened in China this week.  I can’t say that I expected an emergency shutdown of the Chinese markets two times within the first four trading days of the year.

Panic and fear are beginning to grip the global marketplace, and once that starts to happen events become very difficult to predict.

Let us hope that things settle down soon, but I wouldn’t count on it.

As I have said before, 2016 is the year when everything changes, and we are going to see things take place over the next 12 months that are going to shock the world.

Guess What Happened The Last Time The Chinese Stock Market Crashed Like This?

Question Button - Public DomainThe second largest stock market in the entire world is collapsing right in front of our eyes.  Since hitting a peak in June, the most important Chinese stock market index has plummeted by well over 20 percent, and more than 3 trillion dollars of “paper wealth” has been wiped out.  Of course the Shanghai Composite Index is still way above the level it was sitting at exactly one year ago, but what is so disturbing about this current crash is that it is so similar to what we witnessed just prior to the great financial crisis of 2008 in the United States.  From October 2006 to October 2007, the Shanghai Composite Index more than tripled in value.  It was the greatest stock market surge in Chinese history.  But after hitting a peak, it began to fall dramatically.  From October 2007 to October 2008, the Shanghai Composite Index absolutely crashed.  In the end, more than two-thirds of all wealth in the market was completely wiped out.  You can see all of this on a chart that you can find right here.  What makes this so important to U.S. investors is the fact that Chinese stocks started crashing well before U.S. stocks started crashing during the last financial crisis, and now it is happening again.  Is this yet another sign that a U.S. stock market crash is imminent?

Over the past several months, I have been trying to hammer home the comparisons between what we are experiencing right now and the lead up to the U.S. financial crisis in the second half of 2008.  Today, I want to share with you an excerpt from a New York Times article that was published in April 2008.  At that time, the Chinese stock market crash was already well underway, but U.S. stocks were still in great shape…

The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.

Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.

This sounds almost exactly like what is happening in China right now.  First we witnessed a ridiculous Chinese stock market bubble form, and now we are watching a nightmarish sell off take place.  This next excerpt is from a Reuters article that was just published…

Shanghai’s benchmark share index crashed below 4,000 points for the first time since April – a key support level that analysts said had been seen as a line in the sand that Beijing had to defend, below which more conservative investors would start ejecting from their leveraged positions, widening the rout.

Chinese markets, which had risen as much as 110 percent from November to a peak in June, have collapsed at an incredibly rapid pace in since June 12, losing more than 20 percent in jaw-dropping volatility as money surges in and out of the market.

That drop has wiped out nearly $3 trillion in market capitalization, more than the GDP of Brazil.

Did you catch that last part?

The amount of wealth that has been wiped out during this Chinese stock market crash is already greater than the entire yearly GDP of Brazil.

To me, that is absolutely incredible.

And now that the global financial system is more interconnected than ever, what goes on over in China has a greater impact on the rest of the globe than ever before.  Today, China has the largest economy on the planet on a purchasing power basis, and the Chinese stock market “is the second largest in the world in terms of market capitalization”…

Just as in 1929, flighty retail investors make up the bulk of China’s stock market and, just as in 1929 in the U.S., they have heavily margined their accounts. The Financial Times puts the number of retail investors in the Chinese stock market at 80 to 90 percent of the total market. Retail investors, unlike sophisticated institutional investors, are prone to panic selling, which explains the wild intraday swings in the Shanghai Composite over the past week.

Last night, the Shanghai Composite broke a key technical support level, closing below 4,000 at 3,912.77. The index is now down 24 percent since it peaked earlier this month and has wiped out more than $2.4 trillion in value. China’s stock market is the second largest in the world in terms of market capitalization, with the U.S. ranking number one.

Making world markets even more worried about the situation in China, its regulators are showing a similar brand of leadership as Mario Draghi. After previously pledging to trim back risky margin lending, they have now done a complete flip flop and are permitting individual brokerage firms to avoid selling out accounts that miss margin calls by setting their own guidelines on the amount of collateral needed.

I know that a lot of Americans don’t really care about what happens over in Asia, but when the second largest stock market in the entire world crashes, it is a very big deal.

The great financial crisis of 2015 has now begun, and it is just going to get much, much worse.  On Thursday, Ron Paul declared that “the day of reckoning is at hand“, and I agree with him.

So what comes next?

The following is what Phoenix Capital Research is anticipating…

By the time it’s all over, I expect:

1)   Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value.

2)   The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar).

3)   Japan to have defaulted and very likely enter hyperinflation.

4)   US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500.

5)   Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.

I tend to agree with most of that. I don’t agree that the euro is going to go away, but I do agree that the eurozone is going to break up and be reconstituted in a new form eventually.  And yes, we are going to see tremendous inflation all over the world down the road, but I wouldn’t say that it is imminent in Japan or anywhere else.  But overall, I think that is a pretty good list.

So what do you think is coming?  Please feel free to join the discussion by posting a comment below…