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China Suffers as the World Follows Wall Street’s Slump After Rough Day on Wall Street, World Follows Slump
(about 2 hours later)
HONG KONG — As the world followed Wall Street’s plunge, investors on Friday turned their backs on a bet they couldn’t get enough of just days ago: China. HONG KONG — The turmoil gripping Wall Street swept across time zones on Friday as stocks dropped from Asia to Europe with no sector seemingly spared.
Chinese stocks were among the biggest casualties in a broad sell-off across Asia that followed Thursday’s rout in the United States. European markets were also down in morning trading, though by less drastic levels. Markets have sometimes appeared to be following their own mysterious logic in recent days. After Chinese stocks plunged on Friday, European markets were steady — until they, too, fell.
By contrast, futures contracts that track stocks in the United States traded higher during the European day, suggesting investors on Friday might be more optimistic when trading begins there. Just before midday, Europe’s main indexes started to sink and by early afternoon they were deep in the red. Analysts said there was no piece of economic data or other news that would explain the sudden slump.
Friday’s tough day of trading put Chinese shares by some measures into correction territory — shorthand for when stocks fall by 10 percent or more from their peak. Chinese shares have joined those in the United States, which also fell into correction territory this week. “We do not have a specific trigger,” said Jörg Krämer, the chief executive of Commerzbank in Frankfurt. “But that’s not unusual. Volatility is high. Everyone’s nerves are raw.”
Chinese shares are falling for some of the same reasons they are falling in the United States, including worries about inflation and the Federal Reserve’s raising lending rates. But they share one other crucial trait with shares in the United States: They have soared like gangbusters in recent months. Chinese stocks were among the biggest casualties on Friday in a broad sell-off across Asia. It was a stunning reversal for Chinese shares, which investors were snapping up only days earlier.
“We are witnessing the longest rally in the history of Chinese stocks,” analysts at Goldman Sachs wrote to clients early this week, adding, “A tactical correction appears overdue and markets could fall further.” Futures contracts that track stocks in the United States traded higher during the European day, suggesting that investors might be more optimistic when trading begins there on Friday.
China’s shares have benefited from signs of accelerating growth there. An improved global outlook has led to more purchases of Chinese exports. The authorities also seem to have slowed what had been an alarming borrowing binge. If the American markets do move in that direction, it would be a welcome relief for investors. After the rout in the United States on Thursday, both the Standard & Poor’s 500-stock index and the Dow Jones industrial average were in correction territory, with the benchmarks falling more than 10 percent from their recent peaks.
Global investors have been drawn to the growing heft of China’s internet companies, like the Alibaba Group, an e-commerce company that is traded in New York, and Tencent Holdings, a conglomerate with businesses in social messaging and online games that is traded in Hong Kong. While shares of both are down by double digits since the beginning of February, both are still well above levels of just a year ago, putting them among the world’s most highly valued technology companies. The turbulence appears largely to be a product of a global economy that is humming along. For the first time in a decade, all major economics in the world are growing in sync. China has shown signs of accelerating growth while recoveries in Japan and Europe have proven sustainable.
Many other Chinese shares are still way up from a year ago despite the drop. The MSCI China stock index, which tracks shares of some of China’s biggest companies, is still up more than 40 percent since the beginning of last year. Investors are now getting nervous that central banks will raise interest rates in an effort to keep inflation at bay. If policymakers move too quickly, their efforts could temper that global growth.
The Chinese market is not without reasons to worry, however. One possible explanation for the losses in Europe was official data from Italy and France showing solid growth for manufacturers. That might have been enough for some investors to start worrying again that the European Central Bank would ease off on stimulus to the eurozone economy sooner than expected.
Investors this week kept a careful eye on China’s currency, the renminbi. The currency, which is carefully managed by the Chinese government, took a hit on Thursday and fell by as much as 1.2 percent before strengthening a bit on Friday. It is making for a jittery market.
Before that, the currency had been rising steadily against the American dollar, leading to worries that Beijing could step in further to contain it. World markets can be sensitive to sharp swings in the renminbi. In 2015, the Chinese government devalued the currency, sending global markets into turmoil. After being lulled into a sense of complacency by years of steadily rising stocks, even small worries can snowball into a bad day for stocks. The losses can then feed on themselves in a market dominated by computerized trading systems, with the weakness in the United States spreading around the world.
“You can twist yourself into knots trying to figure out what happens day to day,” said Andy Rothman, investment strategist at Matthews Asia.
“But the Chinese government has a lot of control on the currency,” he added. “They can’t control the direction but they can control how much it moves in that direction.”
Still, analysts said shares in China and through much of Asia would continue to follow Wall Street’s lead.
“Asia is going to be the tail that gets wagged by the U.S. dog,” Timothy Moe, chief Asia Pacific strategist at Goldman Sachs, said on Friday.“Asia is going to be the tail that gets wagged by the U.S. dog,” Timothy Moe, chief Asia Pacific strategist at Goldman Sachs, said on Friday.
Europe could be a different matter. Like the United States, Chinese shares have surged in recent months, on the back of a strong economy. An improved global outlook has led to more purchases of Chinese exports. The authorities also seem to have slowed what had been an alarming borrowing binge.
In the logic of stock markets, where bad news can sometimes be good news, recent gains in the value of the euro against the dollar and other major currencies were expected to slow exports and brake the eurozone economy. But the Chinese market is not without reasons to worry. Investors kept a careful eye this week on China’s currency, the renminbi. The currency, which is carefully managed by the Chinese government, took a hit on Thursday and fell as much as 1.2 percent before strengthening a bit on Friday.
Slower growth would, in turn, dissuade the European Central Bank from raising interest rates too soon, and thus prolong the easy credit conditions that were partly responsible for the bull market. Before that, the currency had been rising steadily against the American dollar, leading to worries that Beijing could step in further to contain it. World markets can be sensitive to sharp swings in the renminbi.
Friday’s tough day of trading put Chinese shares by some measures into correction territory. “We are witnessing the longest rally in the history of Chinese stocks,” analysts at Goldman Sachs wrote to clients early this week, adding, “A tactical correction appears overdue, and markets could fall further.”
Shares in Shanghai fell about 4 percent on Friday, while Hong Kong shares lost 3.1 percent. Shares in Tokyo fell 2.3 percent. In Europe, stocks wavered, off more than 1 percent in afternoon trading.
In the logic of stock markets, bad news can sometimes be good news. The recent gains in the value of the euro against the dollar and other major currencies were expected to slow exports and potentially put the brakes on the eurozone economy.
Slower growth would, in turn, dissuade the European Central Bank from raising interest rates too soon, prolonging the cheap money that has been partly responsible for the bull market.
“The E.C.B. has, in fact, a vital interest in keeping euro area interest rates at low levels,” Ralph Solveen, an analyst at Commerzbank, said in a note to clients on Friday.“The E.C.B. has, in fact, a vital interest in keeping euro area interest rates at low levels,” Ralph Solveen, an analyst at Commerzbank, said in a note to clients on Friday.
Shares in Shanghai fell about 4 percent on Friday, while Hong Kong shares lost 3.1 percent. Shares in Tokyo fell 2.3 percent.