BY Fraser Tennant
In a major drop in stocks verging on a meltdown, more than $1 trillion has been wiped from Asian markets following a sharp drop in the value of Chinese shares.
Yesterday saw the biggest one-day drop since 2007 with the Shanghai Composite, the mainland benchmark index, down 8.5 percent at 3,209.91 points (erasing all the gains made this year), the Hong Kong Seng index closed at 5.2 percent (21,251.57 points), and Japan's Nikkei 225 (the region's biggest stock market), closed 4.6 percent lower (18,540.68 points) - its lowest point in almost five months.
Markets were also dragged down elsewhere in the region with the Australian S&P/ASX 200 finished 4.1 percent lower (5,001.30 points), while South Korea's Kospi index ended yesterday 2.5 percent lower (1,829.81 points).
As Chinese shares continue their fall this week, the country's slowing growth and volatile markets sparked panic among global traders, with stock markets in London, Paris and Frankfurt reacting with alarm to the crisis engulfing the world's second largest economy.
"It is a China driven macro panic," said Didier Duret, chief investment officer at ABN Amro. "Volatility will persist until we see better data there or strong policy action through forceful monetary easing."
In a frenzied attempt to reassure investors, the Beijing government has made use of its cash reserves to shore up the market (a figure of at least $1 trillion as been quoted) and has given the go-ahead for its main state pension fund to invest in the stock market.
Under the government’s plans, the fund will be allowed to invest up to 30 percent of its net assets in domestically-listed shares. By increasing demand for them, the government hopes prices will rise. So far though, this intervention appears to have done little to calm the fears of traders both within China and overseas.
"China could be forced to devalue the yuan even more, should its economy falter, and the equity markets are dealing with the prospect of a weaker yuan amplifying the negative impact from a sluggish Chinese economy," said Eiji Kinouchi, chief technical analyst at Daiwa Securities in Tokyo.
If the yuan is devalued further and Chinese citizens end up losing their life savings in the stock market, widespread social unrest may follow: a true nightmare scenario for a an under-fire Beijing government.