24 Aug 2015

Black Monday’: markets plunge over China fears

The Chinese government’s failure to take action sparks panic across global stock markets, with the FTSE 100 dipping to its lowest level since January 2013.

London’s FTSE 100 continued to drop, down more than 5 per cent on Monday afternoon, after fears about the Chinese market came to a head on what Beijing has described as “Black Monday”.

New York’s Dow Jones had its largest drop in a day since 2008 after markets across Europe also tumbled.

China’s Shanghai Composite Index has been a cause of concern for some weeks, but when an expected intervention by China’s central bank failed to materialise on Monday, the situation spread panic across already jittery global markets.

On Monday, China’s stock markets gave up all their gains for the year on a massive sell-off. Alarm bells rang across world markets after the 9 per cent dive in Chinese shares and a sharp drop in the dollar and major commodities panicked investors.

Jasper Lawler, market analyst at CMC Markets, said investors around the world were spooked after China’s central bank “spectacularly failed” to stimulate the economy, in a world where huge stimulus efforts are underpinning recovery efforts in Europe and the US.

Chancellor George Osborne said the slump in world financial markets shows that Britain must “get its house in order”.

What is the problem in China?

China’s economy, which grew at 9 per cent and above per year in the period of rapid industrialisation in the 2000s, has slowed considerably as China reported a sharp fall in exports and producer prices to a near six-year-low.

At the beginning of July, as the British fixated on fears about the Greece economy, Channel 4 News Business Correspondent Helia Ebrahimi wrote that markets were far more concerned about China.

Between the end of June and the beginning of July more than £1.5tr has been wiped off the value of shares, equivalent to 10 times Greece’s annual GDP, prompting fears that China’s stock market roller coaster ride could have much broader implications for the global economy.

Then in August China “stunned the world” by devaluing its currency, the yuan. It was described by China’s central bank as a “one-off depreciation” in a bid to boost export markets.

At the time Channel 4 News Economics Editor Paul Mason said the Chinese bank promised to “take more notice of the markets” when setting interest rates in future. And China’s central bank’s failure to react to the worsening of the crisis caused market panic today.

On currency markets, the pound was little changed against the US dollar and down slightly against the euro. However, in equities, trading screens turned red with almost all of the UK’s top 100 listed stocks falling.

Worst hit were companies in the commodities sector, where prices have been severely hit by fears over China.