Second nosedive sinks oil, sparks fears of overpriced Chinese stocks

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Another sell-off in the fragile Chinese stock markets heightened investors' fears around the world that Chinese equities are wildly overvalued for an economy that may be slowing faster than expected, threatening its ability to prop up global growth.

On Thursday, China halted stock trading for the second time this week after shares fell more than 7 per cent, roiling the world markets and sending oil down more than 5 per cent in one of the biggest energy selloffs since the 2008 financial crisis.

Trading was halted within half an hour of the opening, after the CSI 300 index, a collection of blue-chip shares listed on the Shanghai and Shenzhen markets, plunged 7.2 per cent, triggering automatic circuit breakers. The mainland Chinese markets will not reopen until Friday.

Thursday's market fall extends Chinese shares losses to 12 per cent since the start of the week, marking their worst January start in more than two decades. The immediate catalyst was the currency market. On Thursday, the People's Bank of China surprised investors when it weakened the daily fix rate for the renmimbi by 0.5 per cent over the previous day – the eighth weakening of the currency since August.

But investors exposed to China and other emerging markets have feared for many months that the growth in the Chinese economy is slowing faster than various growth estimates have indicated and that bad loans threaten to swamp the Chinese banking system. The devaluation of the renminbi seems to have convinced investors that that growth is waning quickly.

The high valuation of Chinese shares makes them especially vulnerable to quick, sharp price plunges. Analysts say that the median stock on mainland Chinese exchanges (that is, excluding the Hong Kong market, which remained open on Thursday) was trading at 60 times earnings, or more than three times greater than the median multiple on the NYSE Composite Index.

George Soros, the billionaire former hedge-fund manager, ramped up investors' fears on Thursday by warning that China is having a hard time finding a new growth model after years of double-digit growth. The latest estimates put third-quarter growth in China a 6.9 per cent, a figure that may prove optimistic. "China has a major adjustment problem," Mr. Soros said at investment conference in Colombo, Sri Lanka. "I would say it amounts to a crisis. When I look at the financial markets, there is a serious challenge which reminds me of the crisis we had in 2008."

In a December article in Britain's Prospect magazine, economist George Magnus said that "construct" of China's gross domestic product figure may give a misleading view of the strength of the economy. He noted that China's 30 provinces are reporting wildly significant variations in economic performance. For instance, the country's industry-heavy regions in the north and northeast, was expanding at less than 5 per cent in the first quarter of 2015 and have probably slowed to 2 per cent to 3 per cent since then.

One of the victims of the Chinese market downturn was oil. In London trading Thursday morning, Brent crude, the international benchmark, fell by almost 6 per cent at one point, taking oil to its lowest level since late 2003, before recovering a bit. By midmorning, Brent was down about 3 per cent, at about $33 (U.S.) a barrel, for a one-year loss of 37 per cent. A year and a half ago, oil was over $100.

The oil price plunge has slaughtered the value of energy companies on the London market, with some hitting new 52-week lows on Thurday. EnQuest, one of the biggest independent producers in the North Sea, fell 3 per cent at the opening, to 16.5 pence, a new low. EnQuest shares are down 46 per cent in one year.

The big, diversified oil companies could not escape the carnage. BP, Britain's biggest oil player, lost 3.4 per cent in early trading, taking its shares close to their 52-week low. Glencore, the world's biggest commodities company, lost about 4 per cent, taking its one-year decline to 71 per cent. All the European indexes were in the red. In London, the FTSE-100 index was down 3 per cent and Germany's benchmark Dax index, many of whose biggest companies are heavily exposed to the Chinese markets, was off by almost 4 per cent.

Nomura Holdings see oil falling to US$30 a barrel within 10 days. UBS Group sees prices going even lower as global oil supplies prove resilient to the price collapse. The oil price plunge, if sustained, could devastate the Canadian oil sands industry even if the damage is somewhat cushioned by the fall in the Canadian dollar.

The Canadian dollar last traded at $1.41 (Canadian) to the U.S. dollar, down from its 52-week high of $1.18 to the U.S. dollar. Other oil-dependent countries, such as Russia, have also seen their currencies fall against the U.S. dollar.