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Why the Chinese market just tumbled to a new post-crisis low

The three-year low, explained.

China stock market low 2012 8 20Enlarge
Asian markets edged lower on August 20 in subdued holiday trade while Hong Kong stocks ended flat, edging down 0.06 percent as traders geared up for a week of volatile trading ahead of corporate earnings reports. (Philippe Lopez/AFP/Getty Images)

The Shanghai Composite fell 0.38 percent in overnight trading, falling to a three-year low.

Stocks were hit after home prices continued to climb despite Beijing's promises to maintain a "firm grip" on real estate.

Stocks were also hit after a report from a newspaper run by the People's Bank of China, said that the resumption of reverse repo transactions indicates that the central bank is unlikely to cut reserve requirement ratio in the near-term, according to Reuters.

Moreover, a separate report from Marketwatch said that after two interest rate cuts this year, China might be unable to cut rates further if the yuan continues to weaken, according to Moody's analyst Alaistair Chan.

Chan said markets now think the currency is closer to fair value, rather than "moderately undervalued."

This is one reason why the Shanghai composite hit a new low last night.

And investors are pulling money out of China as they expect yuan appreciation against the dollar has ended.

In fact earlier this month we explained that China might in fact begin a process of weakening its currency to compensate for the slowdown in the economy.

After a decline in new loans, and weaker than expected industrial production, fixed asset investment and retail sales data, investors had been looking for more rate cuts to stimulate the economy.

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