More than $1 trillion was wiped from the value of companies worldwide yesterday as panic about the economic health of China tore through leading financial centres.
George Osborne warned that Britain’s “very open economy” would be particularly vulnerable. Companies in the FTSE 100 lost a combined £74 billion on a tenth successive day of falls.
On one of the worst days for shares since the banking crisis of 2008, when Lehman Brothers collapsed, investors dived for the cover of gold and US government bonds.
The contagion spread to commodity and currency markets with the crude oil price sliding to its lowest level in six years — although this could lead to lower fuel prices for motorists.
The pound and dollar were pummelled amid expectations that interest rates would remain lower for longer in Britain and America.
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Mr Osborne said there was widespread concern about the Asian stock market crash on Sunday night and suggested that the British economy was more exposed than others to the fallout. He said that this was a reminder that Britain was not immune from the “next crisis” and a reason for the country to get its “house in order”.
“Britain is a very open economy, we’re probably the most open of the world’s largest economies,” he said during a visit to Helsinki. “And so we are affected by what happens, whether it’s problems in the eurozone, problems in Asian financial markets.” Since the FTSE 100 reached its high point of 7,100 in April almost 17 per cent has been wiped from the index, significantly reducing the value of pension pots, shares Isas and other savings linked to the stock markets. On paper, tens of millions of Britons are worse off.
Traders said that the move to computer-driven trading with no human input had added to the speed and scale of the slide. “It’s unbelievable,” one City veteran said. “I’ve never seen anything like it. It seems like us against the machines”.
Analysts said that the trigger for the sell-off was another disastrous day in China, after attempts by Beijing to prop up share prices failed. In a crash nicknamed the Great Fall of China, prices slumped by 9 per cent. Shares have now fallen by 38 per cent since June. Jeremy Cook, chief economist at the payments company World First, said: “China sneezed a couple of weeks ago by devaluing the yuan and the effects are finally being felt in a day of massive panic. Investors have hit the ‘sell’ button faster than you can say Lehman Brothers.”
China, the world’s second-biggest economy, has been regarded as a powerful engine of growth for the rest of the world, with its appetite for raw materials, energy and consumer goods improving the livelihoods of Australian miners, Brazilian soya bean farmers and London fashion houses. However, worries that Chinese shares were over-valued have been exacerbated by evidence that its growth rate is faltering.
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The yuan devaluation has also raised the prospect of a dangerous series of tit-for-tat currency depreciations by nations trying to maintain their competitiveness at the expense of others. Mark Dampier, of the stockbroker Hargreaves Lansdown, said the base rate in Britain would not be raised for years. “The sad truth is we’re still only halfway through the financial crisis that began in 2008. Interest rates are staying lower for longer than anyone thought possible,” he said.
On Wall Street last night the Dow Jones industrial average closed 3.6 per cent lower at 15,871 points.
While some bullish analysts said that the crash represented a good buying opportunity for brave investors, others predicted that the turmoil would continue at least until Beijing came up with a bold response. With trading volumes low because of the holiday season, and many decision-makers in investment houses and central banks away, the extreme volatility could continue for some time, they warned.