Margin debt on the Chinese stock market has reached $1.2 trillion. 'We suspect that it’s a matter of time before banks may have to face the music,' Bank of America says
Chinese equities have suffered the sharpest one-day crash in eight years, sending powerful tremors through global commodity markets and smashing currencies across East Asia, Latin America and Africa.
The Shanghai Composite index fell 8.5pc despite emergency measures to shore up the market, with a roster of the biggest blue-chip companies down by the maximum daily limit of 10pc. The mood was further soured by news that corporated profits in China are now contracting in absolute terms, falling 0.3pc over the past year.
The violence of the moves unnerved investors worldwide, stirring fears that the Communist Party may be losing control after stoking a series of epic bubbles in property, corporate investment and equities to keep up the blistering pace of economic growth.
Brent crude prices slid to a five-month low of $53.34, re-entering a bear market. The DB-UBS commodity index fell to 2002 levels, obliterating the gains of the resource "supercycle".
The FTSE 100 fell 1.27pc to 6.497, dragged down by mining groups and energy companies. All of the year’s advances have been wiped out.
Mark Williams, chief Asia strategist at Capital Economics, said the Chinese authorities appear to have been testing the waters to see what would happen if they stopped intervening. The market verdict was swift and brutal.
“They have got themselves into a very difficult situation. They have put a lot of credibility on the line to shore up prices and this credibility has been badly damaged,” he said.
The Shanghai index looks poised to test its 200-day moving average, now just below 3,600, a crucial support level watched with trepidation by China’s authorities.