We now look at the front page of the news only to see another financial crisis brewing – China. What is happening to China’s markets and how will it affect Wall Street?
The Chinese government has always had a hand in manipulating China’s stock market. The Shanghai composite index has been continually propped up by the Chinese government and supported by local investors that are buying stocks with borrowed cash – what could go wrong? Not only does the unfortunate intervention of the government, keeping the stock market afloat, disable any hope of reform for a more free market, but their assistance also led to their stock market dropping 8.5% Monday – it’s biggest drop in eight years.
China is the world’s second biggest economy enduring a stock market correction that is now in its fourth week. The dramatic plunge depicts the total market instability prompted by the Chinese government when they intervened by putting restrictions on stocks, trading and encouraging investors to buy more shares in order to sustain stock prices. Their efforts to stimulate the stock market earlier this month and any efforts they make to keep the market propped up can be considered temporary solutions. As a reflection of China’s stock market today, it is evident that their stabilization policies are not working.
Although there are ways that China’s troubles can have an adverse affect on other markets, the Chinese and U.S. markets are not as directly related as one might think. “China has a set of (market) circumstances that create built-in volatility that is not related to the global economy per se” as stated by Michael McNiven in USA Today. However, some parts of the U.S. stock market are exposed to China’s troubles because S&P 500 companies generate revenue from foreign investment overseas. This continued instability in China increases asset flow to a more stable U.S., resulting in a stronger dollar – a downside for companies that do a lot of international business. U.S. sectors such as auto, tech, health care, and fast food companies may undergo a decrease in earnings if the Chinese economy slows. The downfall of the Chinese stock market also caused oil prices to take a hit. U.S energy producers and other companies linked to commodities may experience a downturn as well. Continued instability may result in a negative effect on investor confidence.
Events in China remain fluid. It’s still too early to tell if the long anticipated Chinese market correction will have a significant impact on our country’s economic growth. We will continue to follow events as they unfold.