Poor economic indicators and the weakening of the yuan crash stock prices and close the Shanghai Stock Exchange

Trading on the Shanghai Stock Exchange was halted on Monday, the first working day of this year, as stock prices plummeted by 7 percent due to poor economic indicators and the weakening of the yuan.

Trading on the exchange was first automatically suspended for 15 minutes after stock prices fell by 5 percent. This automatic trading halt was recently introduced under a new system designed to prevent greater market instability. However, as the decline in prices continued in resumed trading, regulatory authorities completely halted trading about 90 minutes before the official market closing.

– The drop in stock prices prompted investors to sell, and the automatic trading suspension seems to have only increased panic as liquidity suddenly dried up. This is something we have not experienced before. It was a stampede, says Gu Yongtao, a strategist at Cinda Securities.

In Hong Kong, stock prices fell by 3 percent. The poor start to the year on Chinese exchanges is a result of new signs of slowing economic growth. According to a report by Markit, the PMI index of manufacturing activity in China fell in December for the 10th consecutive month, from 48.6 to 48.2 points, significantly below analysts’ expectations and well below the level of 50 points, which separates strengthening from weakening activity. This indicates that hopes for a turnaround in trends in the world’s second-largest economy are premature.

– Government stimulus measures are slowing negative trends, but China must balance the need for stimulus with the reality of rising debts. This will limit the possibility of stimulus in 2016, which signals further slowing of economic growth, says Ross Koesterich, a director at BlackRock.

Analysts at ING, in their commentary on the new PMI report, state that they expect the growth of China’s gross domestic product to slow to 6.5 percent this year. Investors are also concerned this morning because the Chinese central bank fixed the yuan’s exchange rate against the dollar at its lowest level in four and a half years. Last year, the yuan weakened by a record 4.7 percent, and the possibility of further weakening of the Chinese currency, which authorities might do to boost exports, is one of the risks, analysts say, that will threaten markets throughout the year.

– There is speculation that China wants to lower the yuan’s exchange rate significantly. However, at the beginning of the year, trading is often strange. We will see if this continues, said a trader from a Japanese bank to Reuters.