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Stock markets in Asia plunged Monday, leaving investors asking if another China stock market crash is coming in 2016.
The Shanghai Composite tanked 6.9% Monday, and it was the biggest decline the index has ever seen on the first trading day of the year. The smaller Shenzhen Composite plummeted 8.2%.
China's stock market drop today triggered a circuit breaker that suspended equities nationwide. The rout also raised fresh questions about the months of regulatory work implemented to restore China's stock market stability.
The first trading halt on China's mainland stock exchanges came just before 1:15 p.m. Monday.
Amid a 5% drop in the CSI 300, a benchmark of the largest 300 stocks listed on Shanghai and Shenzhen, stocks were halted for 15 minutes as required under new rules implemented in December. As stocks slid further to 7%, a second halt was triggered, this time for the remainder of the day.
The China stock market crash Monday rattled markets worldwide.
Japan's Nikkei Stock Average lost 3.1%, Hong Kong's Hang Seng Index fell 2.7%, and South Korea's Kospi declined 2.2%.
U.S. markets also tumbled. The Dow, the S&P 500, and the Nasdaq were all lower by more than 2% shortly after the open.
Monday's stock market crash in China was the worst single-day performance for the Shanghai since Aug. 25. During the depths of a China stock market crash last summer, major Asian indexes plunged some 40% before officials stepped in. Rampant speculation and the liberal buying of equities on margin were behind the China stock market crash of 2015.
Today the causes were weak manufacturing data and a sliding yuan. A lock-up period that has prevented institutional investors from selling is also coming to an end, and that has increased concerns.
Here's what will end up having the biggest impact on China's stock market in 2016…
Will There Be a China Stock Market Crash in 2016?
The Caixin China manufacturing purchasing managers' index fell to 48.2 in December from 48.6 month over month. A reading under 50 indicates contraction.
December's data marked the 10th consecutive month the figure contracted. Another official survey on Friday focused on larger, state-owned firms showed China's manufacturing sector shrunk for the fifth straight month in a row.
China's central bank allowed its currency to dip to a four-year low on Monday, which added more uncertainty to markets. Traders cited aggressive hedge fund buying of U.S. dollars.
Also contributing to Monday's rout is the imminent end of a six-month lock-up period on shares owned by major institutional investors. A ban on selling in China was put in place on July 8. The move was one of several measures from Chinese officials aimed at bolstering indices in the wake of China's stock market crash last summer.
Haitong Securities analysts estimated that up to 1.24 trillion yuan worth of shares will be freed up for sale by next Monday. That assumes the lock-up period is not extended.
While China's lock-ups and circuit breakers were an attempt to prevent a stock market crash in the summer of 2015, analysts and investors say they could ignite more selling.
Freezes incite panic as losses mount. When lifted, a rush to sell is apt to trigger a halt all over again.
Monday's sell-off could pressure Chinese stock regulators to return to the strict measures used after the China stock market crash last summer.
Monday's sell-off also raises fresh questions about the effectiveness of the China Securities Regulatory Commission (CSRC) and its ability to manage markets as China's economy struggles against a number of major headwinds.
With global markets starting the year with a sharp sell-off, investors may be tempted to run for the exits…
But Money Morning Global Credit Strategist Michael E. Lewitt has shared the best investments to hold in 2016 when the markets are volatile. Here are his top three picks for 2016…
- The Telegraph: Chinese Stock Market Suspended After Shares Fall 7%
- ZeroHedge: China Halts Stock Trading for Day After Entire Market Crashes
- MarketWatch: China Stock Trading Halted After Steep Drop