The Shanghai Composite Index tumbled 3.55% on Friday, to close at 2,900.97, after the People’s Bank of China (PBoC) said Chinese commercial banks issued 597.8 billion yuan ($90.7 billion) of new loans in December, down from 708.9 billion yuan in November, missing the 700 billion yuan forecast by economists polled by The Wall Street Journal. According to MarketWatch, "The lower-than-expected new loans suggest that credit demand remained weak, and commercial banks were still reluctant to lend due to rising credit risks," said Li-Gang Liu and Louis Lam, economists with ANZ Research. 

For the year-to-date, the Shanghai Composite Index is down 18.03%. The index has now fallen into bear market territory, as it dropped 21.27% from the December 23 high at 3,684.57, and may soon test the August 26 low of 2,850.71. 

The Shanghai Composite Index continued its sell-off on Monday and Tuesday with a 5.13% nosedive, despite the PBoC trying to stabilize the daily reference below the 6.5848 yuan to the dollar level, according to the PBoC’s China Foreign Exchange Trade System. The bank had repeatedly intervened in the offshore yuan market in Hong Kong on Tuesday, after efforts by bank officials to talk up the currency on Monday, according to Bloomberg. 

By intervening in the Hong Kong market, the PBoC was trying to curb the gap between the onshore (CNY) and offshore yuan (CNH) rates, which has triggered capital outflows in the past few weeks. According to a Wall Street Journal report on Tuesday, Chinese consumers are racing to buy dollars as the yuan slides, leading to cash shortages at some banks, along with delays in completing transactions. Investors were spooked by fears of a repeat of China’s Black Monday in August, when the Shanghai Composite Index plunged 8.81% on the Tuesday and Wednesday that followed Black Monday’s major meltdown of 8.46%, after the USD/CNY exchange rate hit the (then) four-year high of 6.426 yuan per dollar.

The selling continued into Wednesday, with the Shanghai Composite Index down another 2.42%, despite the China General Administration of Customs report that December exports fell 1.4% from a year earlier, compared with a Reuters poll forecast for an 8.0% drop, after a 6.8% decline in November. December imports fell 7.6%, exceeding economists' expectations of an 11.5% slide, after an 8.7% drop in November. China’s trade surplus was $60.09 billion for December, compared with economists' expectations of $53 billion, and November's $54.1 billion, according to Reuters. Analysts were skeptical of whether the surprise gain in exports is sustainable.

The Chinese economy is slowly transitioning from export-oriented to a consumer-driven economy. The National Bureau of Statistics (NBS) of China reported last month that China’s total retail sales of consumer goods rose a better-than-expected 11.2% year-over-year, to 2.8 trillion yuan in November, and an improvement from October’s rise of 11.0%. The December retail sales data will be released on January 19, with consensus expectations of 11.3% year-on-year growth, according to Trading Economics. On Tuesday, the NBS will also release China's fourth-quarter and full-year 2015 gross domestic product (GDP) data, with consensus expectations for 6.8% annual growth. 

Technically, the Shanghai Composite Index broke down the ascending broadening (ASC/B) wedge chart pattern on January 1 and is now in free fall. The index could fall even further to the base of the wedge, which is between the 2,261.72 and 1,972.0 levels. There are walls of resistances from the current level to the base level, where the index bounces off. A perception of missteps by China’s authorities for their handling of the yuan currency and economic policies could trigger more sell-offs, which will drive the Shanghai Composite Index deeper into bear market territory.