China's Shanghai composite Index tumbled 8.5 per cent to 3,209.91 today (August 24th), erasing all of 2015's gains, after data revealed manufacturing activity fell to its lowest level since 2009.
"It is a key moment for China, with the equity market in free fall, the banking system increasingly starved of liquidity, rising capital outflows and a rapidly slowing economy," IG's market analyst Angus Nicholson wrote in a note.
"The target is now looking overly ambitious and the most sensible way forward would seemingly involve further currency devaluation, further reserve requirement ratio cuts and fiscal stimulus," he added.
All other indexes in Asia collapsed, with Japan's Nikkei 225 Index tumbled 4.61 per cent to 18,540.68, Hong Kong's Hang Seng Index was down 5.17 per cent to 21,251.57 and Australia's ASX 200 dipped four per cent to 5,001.28. South Korea's KOSPI Index was down 2.4 per cent to 1,829.81.
State pension fund to invest in stock market
The crash comes despite China's announcement yesterday that it plans to let its main state pension fund invest in the stock market for the first time.
Under the new rules, the fund will be allowed to invest up to 30 per cent of its net assets in shares listed domestically, Xinhua news agency reports.
The fund will be allowed to invest not just in shares but in a range of market instruments, including derivatives.
But the move failed to stop the spiral downwards for Chinese stock markets. They suffered three weeks of continued losses in June that wiped out £1.5 trillion. Drastic government measures were introduced to stop the slide, with the China Securities Regulatory Commission banning investors holding more than five per cent of a company's shares from selling any of their holdings for the next six months.
Recent data also showed the country's exports fell by 8.3 per cent in July, which led the People's Bank of China (PBOC) to devalue the yuan, arguing that the way it sets exchange rates would now become more market-oriented.
Beijing "not in control"
Global stock markets have lost more than $5 trillion (£3.2 trillion) since it devalued the renminbi.
“I think there is now growing realisation – domestically and offshore – that the Chinese leadership are not in control of the situation. Not only are they not in control of it, they don’t even seem to grasp the problems at times,” economist Fraser Howie, told the Guardian.
"There are no short term fixes for what China is going through. This is ultimately a painful unwinding of imbalances and leverage in the system and those processes are always tough and sore," he added.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.