It took only 29 minutes for the Chinese stock market to plunge 7% again leading authorities to decide early trading halt for the second time this week. Against the backdrop, the fall in oil prices and ongoing fears about world economic growth have been at the source, like an aftershock of a similar move back in August 2015, of what’s happening in China. Yet, rather than panicking, specific facts do exist which could better explain this hectic beginning of the year 2016.
First, Chinese stocks rallied more than 100% for most of the year 2015. Yes the fall is sharp but it started from very high valuations, sometimes uncorrelated with consistent financial data. Second, the constant intervention, perhaps legitimate, of the Chinese government in decisions related to the stock market might have undermined investors’ confidence. Trading halt might be a good solution theoretically, yet it rather seems to add to growing distrust. A frank 30% drop could be more long-term efficient than successive 7% drops suddenly interrupted by the State.