China markets slump despite central bank rate cut

China’s stock market slumped into bear market territory amid panicky trading on Monday, despite its central bank unexpectedly cutting interest rates over the weekend in an effort to stem the selling.

The Shanghai composite index has now lost more than 20% since its recent peak on 10 June, putting it into official correction territory after it more than doubled over the last year. Even including these losses, however, the index is still up more than 29% since January.

The latest falls have been partly fuelled by fears of a growing crackdown by regulators on loans used to speculate on shares, amid concerns that some investors were being forced to sell at a loss if the falling markets triggered breaches in their borrowing terms.

Traders also said the share price boom was out of kilter with the Chinese economy, which is now growing at its slowest pace for six years.

The index closed a further 3.34% lower at 4053.03 on Monday after losing more than 7% at one point in one of the most volatile sessions the market has seen. The escalating financial crisis in Greece also contributed to uncertainty. On Friday, the index closed 7.4% lower.

ING Bank said: “Trying to create an environment for a healthy stock market without stoking speculative excess has proved challenging. Like all recent sharp corrections, Friday’s was triggered by fears of a crackdown on margin lending after a local broker took steps to curb margin holdings.”

There was little comfort from the central bank’s move on Saturday to cut a key interest rate by 25 basis points to 4.85% and reduce the reserve requirements – the amount of reserves that banks are required to hold – by 50 basis points. The bank said one of the policy goalswas to calm stock market fluctuations.

Analysts at UBS said: “After Friday’s ... market plunge, many turned to the authorities for support measures as concerns rose that the rapid unwinding of margin trades was fuelling the sell-off.

“As such, Saturday’s monetary easing will surely give the impression that monetary policy is being used as a direct response to stock market fluctuations. While this belief can help ensure near-term market stability, the impact on longer-term market health is less clear.”

Samuel Chien, at Shanghai hedge fund BoomTrent Investment Management, told Reuters: “The market is still fragile because the clean-up of grey-market margin financing is still going on, and last week’s market tumble triggered some margin calls and some investors are under pressure to sell.”

Meanwhile, Bank of America Merrill Lynch said that recent rate cuts had not prevented shares from falling: “Short-term bounce aside, we doubt that the latest cuts will trigger any sustained rally.”