China’s stock market meltdown has sparked fears over global contagion as commodity prices plunged to record lows.

The events of “Black Monday” and the subsequent Tuesday, which saw huge amounts of capital wiped off the value of China’s companies, left traders “gasping for air”, wrote Frederic Neumann, HSBC’s co-head of Asian Economic Research, warning that any rise in interest rates by the US Federal Reserve this year would put “further cracks into the two main growth pillars for the world economy of recent years: Chinese demand (including commodities) and easy money”.

The PBOC has moved to cut interest rates by 0.25%, the fifth cut in the past 12 months. It simultaneously lowered the Reserve Requirement Ratio – the amount of money banks can lend to the economy.

The Chinese central bank explains that it has intervened to address “fluctuations in the foreign exchange market”, with analysts saying it will again ease the supply of capital into the economy, with a view to stimulating demand.

The capitulation has placed hopes of a recovery in the commodity finance market on ice, with one Hong Kong-based lawyer telling GTR that the summer has been extraordinarily quiet, with large deals and projects being put on hold, as traders wait to see how the downturn will pan out.

While law firms make hay with the rising number of Rmb-related defaults, traders are left with cargoes of oil, the value of which have dropped below US$40 per barrel. Some traders locked in pre-payment deals when Brent was priced at US$60 per barrel earlier this year, with the hope that the market had bottomed out.

The ongoing stock market correction over the past days does not change that picture very much, unless it might trigger a much sharper slowdown of the real economy, which is not our base scenario,” Arjen Van Dijkuizen, ABN Amro

Those traders will now be facing huge losses unless the market picks up soon, with commodities sinking to 16-year lows, and oil continuing to out-perform, as OPEC refuses to consider a cut in production. Bloomberg’s Commodity Index, which follows the price of 22 raw materials, shows that markets have fallen to their lowest levels since August 1999, as China’s slowdown, coupled with overproduction of important commodities, continue to lead to market surpluses across the board.

Analysts had spoken in hopeful terms of the prospects of copper for much of this year, with the continued urbanisation of China’s population creating a continual requirement for copper-based electrification materials and products. However, its prices hit six-year lows in August, with many mines being forced to sell at a loss.

Chilean copper miner Antofagasta posted a fall in profit of 63.8% for the six months to June 30, while Glencore lost US$676mn over the first half of the year, down from a profit of US$1.7bn year on year.

Contagion spread around Asia on Monday, with stock markets and currencies plunging. Further afield, losses were felt on the FTSE in London and the US dollar, showing the levels of exposure around the world to China’s economy. Combined with last week’s surprise devaluation of the Rmb, markets have been spooked.

While still sounding fairly bullish over a soft landing for China’s economy, ABN Amro’s chief economist Arjen Van Dijkuizen tells GTR that the authorities must hold its commitment to further stimulus. He simultaneously expressed concerns over the sluggish domestic demand that has stifled China’s imports.

“Still, even with this scenario of a soft landing, we see that Chinese imports have clearly fallen. The ongoing stock market correction over the past days does not change that picture very much, unless it might trigger a much sharper slowdown of the real economy, which is not our base scenario,” he says.

Linda Yueh professor of economics at the London Business School, says the slump shows how reliant the world has become on China, but backed the government’s plans to restructure the economy to create new opportunities for traders.

“Foreign investors will be wary of volatility as China’s reforms progress, but it’s worth bearing in mind that the slowdown is also part of the structural transformation of the economy into one being driven by its own middle class and not exports which offers huge opportunities for foreign investors over the longer-term. It’ll take some time before China adjusts to a more stable growth path, which is to be expected of an economy that has just become middle class. So, this sort of volatility will be with us for a while and perhaps worse. On the other hand, China has been known to surprise with a quick adjustment and rapidly assimilated market reforms,” she says.