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Shanghai Stocks Continue to Dive as Global Markets Elsewhere Stabilize

25th August 2015

By NEIL GOUGHAUG. 24, 2015

The Latest

■ In China, the benchmark Shanghai composite index closed 7.6 percent lower.

■ Other markets in Asia stabilized or rallied modestly, swinging from losses to gains. An exception was Japan, whose stocks seesawed before closing down 4 percent.

■ European equities rebounded, clawing back some of Monday’s losses. The Euro Stoxx 50 rose 3.4 percent in late-morning trading. In London, the FTSE 100 rose 2.5 percent.

■ The international and American oil benchmarks rebounded, despiteconcerns about oversupply.

■ Stock markets in the United States were volatile on Monday, with the Standard & Poor’s 500 index closing down nearly 4 percent. Futures were pointing to a higher opening on Wall Street on Tuesday.

In Depth

After a three-day rout that erased nearly $3 trillion in value from stocks globally, markets on Tuesday showed signs that selling pressures were easing.

Volatility continued to dominate early trading in Asia, but many regional markets swung from losses to gains for the first time in days. Stocks in Europe opened higher, and trading in Standard & Poor’s 500 index futures suggested New York would also open the day with a strong surge of buying.

Across Asia, the free fall of the past few days appeared to have ended — except in China, where Shanghai stocks closed 7.6 percent lower after Monday’s 8.5 percent plunge.

Stocks in Japan closed down 4 percent after seesawing between losses and gains. Shares elsewhere staged modest rallies. Australia’s benchmark index closed up 2.7 percent, while the Hang Seng index in Hong Kong closed 0.7 percent higher. By late morning, the Euro Stoxx 50, which groups the biggest blue chips from France, Germany and other eurozone members, had climbed 3.4 percent and the FTSE 100 had risen 2.5 percent.

Markets around the world have been jolted in recent days by concerns about China’s ability to be a powerful engine of global economic growth. That has added to worries about the potential impact of higher interest rates in the United States.

The sell-off had weighed heavily on commodities and regional currencies, pushing the prices of many to their lowest levels since the financial crisis.

But signs of a rebound emerged in early Asian trading on Tuesday. Many Asian currencies rose against the dollar for the first time in days. The Japanese yen, a regional haven currency, slipped against the dollar after a four-day rally.

Futures contracts for American and European benchmark oil prices rose sharply. Industrial metals also rose. Shanghai copper futures rose more than 1 percent in morning trading but then slumped.

However, big questions about the health of China’s economy, and the capacity of the country’s leaders to manage its slowdown, remain unanswered.

The tumult has had many analysts grasping for explanations, given the lack of any significant new data that would explain the big market moves.

On Monday, the steepest losses in the New York markets ended within minutes after opening, with share prices spending the rest of the day sharply rising and reversing course multiple times. When the day’s roller-coaster ride ended, the benchmark for stocks, the Standard & Poor’s 500, was down 3.9 percent. That left the index off 11 percent from its May high, called a “correction” in market parlance, its first since 2011.

Beyond the questions about what exactly caused Monday’s moves, the recent market turmoil has now led many investors to turn their focus to the government officials who have become the most important players in the market since the financial crisis.

Oil Prices: What’s Behind the Plunge? Simple Economics

In particular, there is a growing debate among market participants about whether the Federal Reserve will still follow through with plans to push interest rates higher, an action that was expected to begin in September. The market turmoil has led some, including Lawrence H. Summers, a former chief economic adviser to President Obama, to call for the central bank to reconsider those plans.

Investors have also been looking to Beijing. Over the weekend, there were expectations that the Chinese government would take more aggressive steps to stem the recent declines in the Chinese stock market and the renminbi, the country’s currency.

Previous moves, though, did little to beat back concern about a weakening economy in China, and Chinese officials declined to do anything significant on Monday.

The debates in both China and the United States have often turned to more worrying questions about whether the levers that central bankers use to influence the markets are losing their power after years of extensive intervention.

With all the hand-wringing, however, many investment advisers have been urging clients to ignore the recent swings.

And although a number of American companies stand to be hurt by any weakness in China, recent data has suggested that the economy in the United States is continuing to gain strength.

Even apart from the problems in China, many analysts have said that high-flying American stocks were due for a pause after the steady upward climb that has characterized the American stock market over the last four years.

Many investors say they are now hoping that the People’s Bank of China, the country’s central bank, will cut the ratio of deposits that banks are required to keep on reserve in a bid to encourage lending and spur economic growth.

In the meantime, there are big questions about whether China’s stock market plunge will make the Chinese economy, the world’s second largest after that of the United States, even weaker.

Xu Sitao, the chief China economist in the Beijing office of Deloitte, said in a speech in Hong Kong that the effect on the economy could be muted because equities represented only 7 percent of the overall wealth of urban Chinese households, which continue to rely heavily on real estate in their holdings.

In the United States, too, economists were hopeful that the activity in the markets would not spread to the broader economy.

The slump in China’s stock market has come amid conflicting signals from Beijing.

After a tremendous rally fizzled in June, the Chinese government resorted to exceptional measures to try to prop up share prices, including ordering state agencies to buy shares and banning large shareholders from selling. Those measures now appear to have failed.

By late morning on Tuesday, China’s were the only major markets in Asia still in negative territory. The Shanghai index was trading at its lowest level so far this year, down about 4 percent from Monday, while Shenzhen was 5 percent lower.

In an apparent reflection of policy-making dissonance in Beijing, China’s state-controlled financial news outlets gave voice to a debate about future state intervention in the markets.

“The slump in the stock markets is destroying what remains of investor confidence, and this problem is profoundly serious,” said a front-page commentary on Tuesday in the official Securities Daily, defending interventionist policies.

However, a rival commentary in another official news outlet, The Economic Information Daily, said that it was time for the government to step back from shoring up the stock market.

“The domestic policy focus should be on steadily retreating from stock market bailout policies,” the front-page commentary said. “Government bailouts are meant to avert financial risks, not to prop up stock prices.”

Neil Gough reported from Hong Kong. Chris Buckley contributed reporting.

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