Published On: Fri, Feb 5th, 2016

In-Depth Analysis: The January 2016 Stock Market Crash In China

Some people assumed that 2016 would offer them a prosperous new year. Alas, it wasn’t to be in January – at least on the Chinese stock market! One of the year’s most notable stock market crashes to date made headline news globally.

Shanghai Stock Exchange

During the first week of trading, trading on China’s stock market closed early. This had a global impact and wiped a lot of money off the value of shares everywhere.

So, what happened for such an event to occur? After all; China is one of the world’s economic powerhouses?

The stock exchange circuit breakers got triggered

Perhaps the obvious reason for the troubles in China’s stock market was to do with its breakers. A stock market circuit breaker is one that shuts down trading if the market is down by a certain amount.

The Chinese regulators installed such breakers to err on the side of caution. Many finance experts suggest they do more harm than good, as one can see from this recent example in China. Other stock markets also have those circuit breakers, such as the one in New York. Their use is controversial, as you may have gathered!

Thankfully, the regulators in China have removed those stock exchange circuit breakers. Still, all we know so far is how the stock market crash happened. But, we don’t know why? Many industry experts have speculated on the causes. Some of the most viable ones are as follows:

The Chinese are mainly exporters, not consumers

Perhaps one obvious fact about China is they export a lot of stuff. Most things that we all use today, including the system you’re using, have parts that were made there.

Although China has a large population, they aren’t big consumers. More foreign companies are moving their manufacturing to domestic locations. As a result, China is losing a lot of export business. The government there is trying to get the population to consume more than export.

But, the rate of growth among the rising middle classes is slow.

China is attempting to reduce the value of their currency

The country needs to boost their GDP somehow. Of course, they want people in the country to buy more stuff. For now, they can only rely on their export markets.

By weakening the value of the RMB (yuan), they’ll be a better bet for foreign customers. In other words, western nations would get more for their money by importing goods from China.

Foreign investors get fooled into the illusion of China’s influence

One problem with China is the poor accounting transparency and governance in the country. Or, to put it another way, corruption is rife. Foreign investors panic when they see dramatic changes in the Chinese stock market.

As a result, ill-informed investors send the rest of the world into a panic as well. China knows that its economy will grow, albeit at a slow pace. It’s not likely that it will go into freefall and cease to exist!

What many foreign investors don’t realise is this. China doesn’t (and shouldn’t) have a major influence on the world’s economies. After all; other countries mostly buy from China, they don’t sell to the nation.

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