China stock markets crashed overnight, raising fears of a Chinese economic collapse.
On Saturday, June 27th, the People’s Bank of China (PBOC) lowered its benchmark interest rates for the fourth time since last November in an effort to put brakes on the stock market crash. The Chinese central bank lowered the one-year lending rate by 25 basis points to 4.85%. They also lowered the one-year deposit rate by the same amount to two percent. Moreover, the PBOC also lowered reserve ratios for some lenders by 50 basis points.
In spite of the central bank’s best efforts, Chinese stock prices continued to tumble. During the trading session on Monday, the Shanghai Composite Index and the Shenzhen Composite Index plunged 3.3% and 5.7% respectively. More than 1,500 stocks plunged 10%, the maximum daily loss allowed by regulators.
One part of the Chinese stock market that has been losing steam consistently is the ChiNext board, a NASDAQ style board on the Shenzhen Stock Exchange that focuses on fast-growing and innovative companies. The ChiNext Index lost 7.9% on Monday. Since June 11th, the index has lost a staggering 31%.
Analysts think that the ChiNext board is the most dangerous part of the Chinese stock market today. This is because companies on the ChiNext board have climbed to astronomical highs in the first half of this year while fundamentals did not produce similar growth. Investors are downsizing their holdings of companies on the ChiNext board as companies prepare for their mid-year reports, which will likely be disappointing. (Source: Sina, June 29, 2015.)
The bearish outlook for many Chinese companies was reinforced by disappointing economic data. China’s economic growth has been lackluster so far this year; exports were dismal and manufacturing was struggling. If the economic output of China does not improve, analysts expect more funds to be withdrawn from the Chinese stock market.