China Stock Market Plummets

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Shanghai index drops 8.5 percent Monday despite drastic measures by Beijing to prop up stock prices

July 27, 2015 7:57AM ET

Chinese shares tumbled more than 8 percent on Monday, the biggest drop since 2007, as an unprecedented government rescue plan to prop up valuations abruptly ran out of steam, casting doubt on Beijing’s ability to stave off a deeper crash.

The fall comes after a period of optimism that led small investors to put money into the market, and many have suffered significant losses. Relatively few foreigners hold Chinese stocks, so the ripple effect has so far only hit the country’s financial hubs of Shanghai and Hong Kong. Hong Kong’s Hang Seng shed 3.1 percent Monday at 24,288.54.

The Shanghai Composite Index closed down 8.5 percent at 3,725.56, with most of the plunge occurring in the last hour of trading. Other stock benchmarks around the world also were lower. Monday’s fall on the Shanghai market was the biggest one-day decline in Chinese stocks since an 8.8 percent plunge on Feb. 27, 2007, according to financial data provider FactSet.

The drop comes after three weeks of relative calm in China’s volatile stock markets since Beijing unleashed a barrage of support measures to stop a slump that had started in mid-June.

“The lesson from China’s last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect,” wrote Capital Economics analysts in a research note reacting to the slide. The last bubble hit its high in October 2007, Bloomberg reports.

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 gains. But analysts have been skeptical that such gravity-defying efforts could be sustained.

“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 percent 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.

The government achieved some stability in the market after it announced drastic support measures earlier this month, including forbidding major shareholders from selling any of their shares, while 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.

The Shanghai benchmark had risen about 150 percent over the 12 months prior to June 12, according to Bloomberg. The gains were driven by commentary in state media that called the stock market undervalued. That led investors to believe the government would ensure that stock prices would rise.

Al Jazeera and wire services