Updated on December 7 at 4:39 p.m. ET
Chinese stocks plunged 7 percent Thursday, closing markets 29 minutes after trading began, and raising more fears about the health of what by some measures is the world’s largest economy. Consequently, markets across Asia and Europe slid, and U.S. stocks, which have already seen their worst three-day opening since the recession in 2008, extended that losing streak.
Thursday’s selloff in China was attributed to a decision by the People’s Bank of China, the country’s central bank, to set the midpoint rate on yuan at 6.5646 per dollar, or 0.5 weaker—that’s the lowest level since March 2011, Reuters reported.
“The Chinese yuan is smack bang at the heart of concerns,” Chris Weston, chief market strategist in Melbourne at IG Ltd, told Bloomberg. “For risk assets to stabilize and sentiment to turn around, we are going to need a stable or even positive move in the Chinese currency. It’s clear that the market is becoming increasingly concerned by the global inflation outlook.”
The Chinese central bank’s move increased already-heightened fears over the health of the Chinese economy. Although the country is expected to grow 6.5 percent this year—enviable by most other standards—much economic data coming out of the China is pessimistic. The decision in currency markets could indicate, analysts say, that the economy is doing worse than expected. A cheaper yuan, in theory, would boost Chinese exporters, who have been struggling.
“That’s the fear of the market,” Sim Moh Siong, FX strategist for Bank of Singapore, told Reuters, adding it was a zero-sum game as other currencies weakened in response. The result: greater volatility.
“China has a major adjustment problem,” George Soros, the billionaire investor, said Thursday at an economic forum in Colombo, Sri Lanka, in remarks reported by Bloomberg. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”
But other investors said the Chinese market declines appeared worse than they were.
“Investors should bear in mind that the China equity falls are more correlated with short-term psychological factors rather than the underlying China economic conditions,” Ben Luk, a global market strategist at J.P. Morgan Asset Management, wrote in a note, cited by The Wall Street Journal.
Indeed, the current market pessimism, which has seen $2.5 trillion wiped off the value of global equities in the first six days of this year, also comes amid worries about oil, which are near their lowest prices in more than a decade amid a supply glut and worries about the health of the global economy. Consequently, safe havens, such as gold, have gained sharply.
In the U.S., where markets have been trounced this week, investors pored over the latest minutes from the Federal Reserve’s December policy meeting at which the benchmark interest rates were raised for the first time in nearly a decade. The minutes of the meeting revealed concerns among officials that inflation would remain above the goal of 2 percent.
“For people who’ve come back to work from the holidays, we’ve just had a reality check,” Alastair George, chief strategist at Edison Investment Research, told the Journal. “It’s not exactly an environment in which people want to take on risk.”
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