Chinese stocks plunged by more than 8.5% on August 24 due to investors’ weakened confidence over macroeconomics in domestic and global markets. It was the biggest one-day percentage loss since 2007. The decline offset market gains made since the start of the year. All index futures contracts sank by the 10% daily limit, reflecting a negative outlook for share prices. On August 25 stocks tumbled to their deepest four-day decline since 1996. The Shanghai Composite Index was down 7.63% to 2,964.97 points at the close, falling below 3,000 points for the first time since December. The Shanghai index has tumbled more than 20% since the yuan’s devaluation on August 11 and has lost more than USD4 trillion in value since its June 12 peak. Mark Matthews, Managing Director at Bank Julius Baer, said the current situation will persist for another month, since concerns remain that growth in the Chinese economy is slowing. He forecast better days in around six months as reform of China’s state-owned enterprises (SOEs) progressed.

China will allow its huge state pension fund to invest in domestic stocks in an attempt to boost returns. The fund will be able to invest up to 30% of its net assets in equities, according to final guidelines published by the central government. The fund, to which workers must contribute, had CNY3.5 trillion in net assets at the end of last year. The move could allow the fund to invest billions of yuan in domestic equities, convertible bonds, futures and infrastructure projects. Previously, the pension fund could only invest in treasury bonds and bank deposits. Four of China’s brokerages – Haitong Securities, GF Securities, Huatai Securities and Founder Securities – announced they were being probed by regulators for suspected failure to review and verify clients’ identities. Managers from Citic Securities were also being investigated for possible involvement in illegal securities trades. Chinese police have summoned 11 people including a financial journalist to assist their investigations into illegal stock market activities, as the government targets volatility on the exchanges.

China has the world’s most volatile stocks right now after Greece, yet the fluctuations are 30% lower than the average of six financial market crashes, including the ones in 1929 in the United States, Japan in the early 1990s and Thailand in 1997. The 43% decline so far in the Shanghai Composite Index looks modest when compared with a 78% retreat during the bursting of the dotcom bubble in 2000 and an 84% slump in the Russian market following the 1998 default. Most of the previous stock frenzies were caused by banking crises and debt defaults, while China’s stock slump is largely a price adjustment to a frothy valuation following a more than 150% surge.

Shanghai shares recovered on August 27 and 28. The Shanghai Composite Index rose 4.8% to close at 3,232.35 points, paring last week’s loss to 7.9%. It has been a wild week for China’s equity market investors as a crash wiped nearly 17% off the index in three days before the rebound.