An investor watched an electronic board Monday showing stock movements at a securities firm in Bangkok, Thailand. At midday, Bangkok’s stock market had plunged 3.84 percent after jitters over China’s economy sent world share markets tumbling.
The Chinese stock market continued to tumble Monday, with losses in the billions and markets consequently plunging all over the world. The Chinese stock market crash has been called “China’s Black Monday” by an official Beijing spokesperson, in reference to when global stock markets crashed in 1987, causing steep losses that took place over a matter of hours.
“There are many, and legitimate, contributing factors to the global economic slowdown narrative,” Nigel Green, chief executive of the financial consulting firm deVere Group told Reuters. “These include China-related issues, such as the recent devaluation of its currency, the stock market’s boom and bust in recent months, and slower GDP growth,” he said.
China’s crash did not happen overnight, even if the sharpest of its losses, with the market dropping 8.5 percent, happened over the course of Monday morning local time. In order to understand how China’s market crash came to be and what it will mean for the rest of the world, it is necessary to look at the events leading up to what is now being called China’s Black Monday.
June 12: The Chinese stock market reached a record high following government intervention efforts made throughout the months of May and June. Stock prices began to slide downward in the days following, however, and continued to drop throughout the summer.
July 4: The Chinese government suspended the sale of new stocks to stave off continuing losses, to little avail.
July 31: The Shanghai Composite closed the month with a 15 percent decline, making it the worst month for the Chinese stock market since 2009.
August 10: The People’s Bank of China devalued the currency of the yuan by almost 2 percent in an effort to respond to a recent economic slowdown in the country. Shares in Beijing began to drop almost immediately in the days following.
August 18: Stock markets across Europe, in the U.S., and Australia began to see losses that would continue throughout the next four days.
August 21: The Dow Jones Industrial Average sunk 531 points, closing with the worst losses since 2011.
August 23: The Shanghai Composite plummeted 8.5 percent overnight, counting some of the worst losses in China’s stock market since 2007.
August 24: “Black Monday” began as China’s markets opened to steep losses and analysts said they feared the crash would continue to damage the New York Stock Exchange and markets worldwide.
International Business Times
China’s latest stock market crash: the basics
China’s benchmark Shanghai Composite index is down more than 8 percent in Monday trading. The market is now down 38 percent from its June peak.
Over the past month, the Chinese government has taken extreme measures to reverse the stock market’s decline — but these measures now appear to be failing.
The decline in Shanghai is part of a worldwide selloff. Stocks in Japan, Taiwan, Hong Kong, South Korea, and Australia all posted big losses, and stocks are also down in major European markets.
China’s stock market had a debt-fueled boom, followed by a crash
Between June 2014 and June 2015, China’s Shanghai Composite index rose by 150 percent. A big reason for the stock market rally was that a lot of ordinary Chinese people began investing in the stock market for the first time. More than 40 million new stock accounts were opened between June 2014 and May 2015.
And many have been buying stocks with borrowed money. The Chinese government used to strictly limit this practice, but over the past five years the government has gradually relaxed those regulations.
Earlier this year, the authorities became concerned that the stock market’s rise had become unsustainable. So they began to tighten limits on debt-financed stock market speculation. The stock market peaked in June and then began to fall quickly.
Efforts to prop up the market haven’t worked
By early July, the market was in free fall, and the Chinese government began to panic. Authorities took a number of steps to push stock prices back up:
The central bank provided more cash to the China Securities Finance Corp, a state-run company that lends people money so they can buy stocks.
Initial public offerings were suspended, so that newly issued shares wouldn’t compete for capital with those already on the market.
Companies’ major shareholders — those with more than 5 percent of a company’s shares, as well as executives and board members — were banned from selling shares for six months.
China’s securities regulator ordered companies to either buy their own shares or encourage their executives or employees to do the same.
Those efforts seemed to work for a few weeks. The Shanghai Composite rose from the July 8 low of 3,507 and seemed more stable. But that proved to be a temporary reprieve. Last week, the market began to plunge again.
Once again, China tried to prop up the stock market, announcing that a major state pension fund will be allowed to invest in stocks for the first time. But the market was unimpressed with the announcement.
No government likes to see its stock market crash, but the plunging Shanghai Composite will be particularly embarrassing for the Chinese authorities. Positive coverage from state-run media helped fuel last year’s stock market boom, and last month’s decision to intervene in the stock market tied the government’s prestige even more tightly to the market’s performance.
The Chinese economy is struggling
The broader Chinese economy isn’t doing very well either. Official figures show the Chinese economy growing at a 7 percent rate in the second quarter. That’s slow by Chinese standards, and many Western economists suggest that the official figures overstate China’s growth.
Weak Chinese growth has exerted downward pressure on China’s currency. The Chinese central bank allowed the currency to fall by 3 percent earlier this month.
For the past two decades, China has benefited from an export-oriented growth strategy. But exports can’t power China’s growth forever — world markets just aren’t big enough. So China needs to transition to an economy that’s powered more by domestic consumption. And as Vox’s Max Fisher has written, the economic reforms required to facilitate that won’t be easy.