Taking Stock of the Chinese Market Crash

The+Chinese+stock+market+dropped+sharply+beginning+in+June.++%28moneyweek.com%29

The Chinese stock market dropped sharply beginning in June. (moneyweek.com)

Before this summer, stock markets around the world were looking pretty good. The United States stock market had been rising for the past four years, driven up by the Federal Reserve’s policy of near-zero interest rates. The most impressive stock market, however, appeared to be China’s, which had been rocketing up since early this year.

Then June 12th happened. The Chinese stock market bubble popped, and the Shanghai Composite Index lost a third of its value within a month. Both foreign and Chinese investors scrambled to get out of the market. The Chinese government tried to control the massive selloff by ordering companies not to sell their shares and giving money to brokerages to buy up shares. These measures failed to control the crash. Instead, the instability spread to markets around the globe. Why did the crash occur, and what are its effects?

The Chinese government controls the country’s stock market, and investors know it. Before this summer, however, they believed the government to be competent with its intervention and capable of ensuring growth. Earlier this year, even as China’s economy slowed, the government decided to support the stock market by making it incredibly easy for Chinese citizens and businesses to borrow money to purchase stocks. As small investors piled into the market, the bubble began. When the government then limited what investors could borrow in an attempt to control the bubble, investors panicked and moved to get out of the overvalued market.

Now that the Chinese government’s attempts to control the crash have failed, people have lost confidence in the country’s ability to successfully manipulate its markets. Ted Truman, a former top financial diplomat at the U.S. Treasury, says Chinese policy-makers now “look less like a smooth-oiled machine and more like they are making it up as they go along” (“China Slump Worries Finance Leaders,” The Wall Street Journal).

The drop in China’s markets has had a worldwide impact. China’s regional trading partners, like South Korea and Vietnam, are in trouble. Emerging markets are struggling as Chinese demand for raw materials drops. Worries about the effects of China’s slowdown have prompted a selloff in United States markets, and companies like Apple and General Motors could be hurt as Chinese consumers stop buying their products. Overall, the crash has caused instability and nervousness in economies everywhere. Investors and emerging economies are simultaneously worrying about whether the Federal Reserve will raise interest rates later this month, a move that would hurt stock markets. With the full effects of China’s instability yet to be seen, and the interest rate question on the horizon, big changes for markets may be looming in the near future.