Markets were tipped into freefall on Thursday with both Australian shares and the Australian dollar crunched in the wake of a deepening round of declines on China's markets amid fears that the Chinese government may not be able to stem investor selling.
For the second time this week, China was forced to suspend sharemarket trading following declines of more than 7 per cent in the Shanghai market as investors dumped shares ahead of the planned removal of a six month ban on share sales by large companies.
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China turmoil sends oil, stocks sliding
Global shares tumble while oil prices slide to levels not seen since the early 2000s, after China allows the yuan to fall sharply again.
The downturn has wiped an estimated $78 billion off the value of Australian shares this week alone with the market falling more than 5 per cent as the key ASX 200 index has slid towards the 5000 point level and the Australian dollar has fallen to two month lows at around US70¢.
After trading in its sharemarket was suspended on Thursday, China issued new rules to restrict share sales, which prompted fears it may provoke further selling. Last year, to stabilise its market, the Chinese government banned share sales by large companies for six months with that ban due to expire at the end of this week.
The new rules "will help stabilise market expectations and ease panic", the China Securities Regulatory Commission said, adding it did not anticipate an imminent exit of the "national team" of investors who took part in the market's rescue last year by buying up shares.
According to the rules, "institutional investors that built large stakes in the market over time will not be restricted in their sales", said Oliver Barron, the China head of analysis at China-focused investment bank NSBO.
However market intervention would only hit investor confidence in the long run.
"Many foreign investors wanted to believe that the lesson the government learned from the [northern] summer [of 2015] was that intervention doesn't work.
"Today's move confirms the opposite: that the government simply believed this summer's intervention just wasn't strong enough. The government has confirmed that it will continue to intervene as and when needed."
The Chinese market regulator outlined new rules which are intended to limit share sales while forcing sellers to give notice of the planned sales. The rules were aimed at avoiding the effect of "intensive and massive" share reductions from listed companies' senior executives and big shareholders, which are defined as investors with a more than 5 per cent holding.
But more important for many investors was the extended decline of the Chinese currency, the yuan. On Thursday, China devalued its currency a larger than expected 0.5 per cent to a five-year low against the US dollar amid speculation of rising volumes of capital fleeing the mainland which also triggered heavy selling of the Australian dollar.
ANZ Bank told its clients the continued slide of the Chinese currency could "create one-way expectation of [yuan] depreciation, propelling capital flight and leading to significant financial instability". All major markets in the region were caught in the downdraft, with the Australian market losing 1 per cent, Hong Kong 1.7 per cent and Japan more than 2 per cent.
Investors were unnerved by the continued fall of the Chinese currency, Russell Investments portfolio analyst Andrew Zenonos said.
"The key thing has been the Chinese decision to weaken the currency further. Once that came out the Chinese market opened quite lower and put further pressure on the Australian market."
- with Agencies