China stocks start new week with 5.3% drop

Three reasons why China's stock market is collapsing
Three reasons why China's stock market is collapsing

Chinese stocks plunged deeper into negative territory Monday after a brutal first week of the year.

The Shanghai Composite closed down 5.3%, and the Shenzhen Composite ended 6.6% lower.

The grim day of trading followed steep declines in Chinese stocks last week amid worries over the country's slowing economy and weakening currency.

The turmoil in Chinese markets rippled out around the globe: the Dow lost 1,079 points, or more than 6%, over the week -- the index's worst five-day start to a year on record.

The chaotic trading in China was made worse last week by a so-called "circuit breaker" mechanism introduced by authorities in an effort to reduce the volatility that had characterized the country's stock market rout during the summer.

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But regulators ditched the new measure, which halted trading for the day when stocks dropped 7%, after only four days because of concerns it was fueling trading losses rather than reining them in.

Analysts say they expect the rocky start to the year for Chinese shares to continue, though.

At the heart of the tumult are a series of drops in the value of the country's currency, the yuan.

In recent weeks, the central bank has attempted to guide the yuan lower against the U.S. dollar, a move that many analysts have interpreted as an effort to aid Chinese exporters and prop up weakening economic growth.

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But the bank's approach has alarmed investors who have aggressively sold the currency, believing its declines will continue.

The chaotic trading in the yuan has undermined investor confidence in Chinese authorities and their ability to smoothly manage the world's second largest economy as it cools down from decades of double-digit growth.

Weekend data provided more evidence of softer demand in China. Consumer prices rose by just 1.4% in 2015, their slowest pace in six years and well below the government's 3% target, state news agency Xinhua reported.

Capital has been flowing out of China as investors seek higher returns elsewhere. And the country has been forced to dig deeper into its vast foreign currency reserves to try to stop the yuan from falling too rapidly.

Currency strategists at HSBC said in a research note Sunday that they expected yuan volatility to to "remain high while depreciation pressures are likely to remain strong."

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