What the market plunge in China says about the global economy

BEIJING -- After the Chinese stock market started 2016 with a plunge that unnerved investors globally, here are some questions and answers about the turmoil.

See Full Article

WHY DID THE CHINESE MARKET DROP SO MUCH?

China's main stock index, which tumbled nearly 7 per cent on Monday before trading was halted under a new emergency measure, has been volatile for months.

The latest drop appears largely due to the same concerns: a slowdown in the world's second-largest economy, greater investor caution after markets hit dizzying heights last year, and Beijing's attempts to unwind controls on trading.

A report showing a further decline in manufacturing, a huge sector that has fueled China's economic surge in past years, prompted investors to sell on Monday. China is in the midst of a massive plan to shift its economy away from its traditional reliance on industry and exports toward consumer spending.

Another concern is an expected decline in the Chinese currency, the yuan. A drop in the yuan could make foreign debt held by Chinese companies harder to bear and encourage investors to pull money out of the country.

Adding to these worries on Monday are geopolitical tensions in the Middle East. Saudi Arabia said Sunday it is severing diplomatic relations with Iran, a development that could potentially threaten oil supply. Oil prices rose on the news.

More practically, Beijing is trying to undo limits on markets, such as new stock offerings, that it imposed last summer, when markets began falling.

Stocks had more than doubled in the 12 months leading up to the first of a series of plunges, as state media encouraged the public to invest. Prices started to fall in mid-June after regulators imposed limits on the amount of money brokerages could lend to customers to trade shares. That prompted concern among investors that authorities would no longer support share prices.

WHAT DOES THIS MEAN FOR INVESTORS ELSEWHERE?

China's stock market is one of the world's biggest, but most investors in the United States and elsewhere own very small amounts, if any, of the stocks at the centre of the tumult. Markets in Shanghai and Shenzhen are slowly opening to foreign investors, but many barriers to direct ownership remain.

The Chinese stocks that most U.S. and other foreign investors own directly or through mutual funds trade instead in Hong Kong. These stocks have also fallen, but they've largely been steadier. They also tend to make up relatively small portions of the diversified funds available in many employer-sponsored retirement accounts. The bigger worry for investors outside of China may be the spillover effect that a tumbling Chinese market could have. The turmoil in China's market helped pull other global stock markets lower on Monday.

WHY DID GLOBAL INVESTORS REACT WITH SUCH ALARM?

China is the world's second-largest economy and has been a key driver of global growth for several years. But its growth has been fading recently. In the quarter ending in September it fell to a six-year low of 6.9 per cent.

The country's manufacturing sector is a huge buyer of raw materials and energy from countries like Australia, Brazil, Chile and Russia, as well as machines from the likes of Germany. Many consumer goods companies and automakers are also hoping to sell more to increasingly wealthy Chinese households.

The potential risks are reflected in the global market drop on Monday. Germany's stock market was down a whopping 4 per cent. In the U.S., the Standard and Poor's 500 index lost 2.6 per cent in morning trading.

IS CHINA'S STOCK MARKET A RELIABLE INDICATOR OF ITS ECONOMY?

Not as much as in the U.S. or Europe.

Chinese stock markets have little connection to the rest of the government-dominated economy. The biggest companies are state-owned and their health is decided by official policy.

Traders respond more directly to government cues and the availability of credit. Stock prices can rise when the economy is weakening or fall even though conditions are improving.



Advertisements

Latest Economic News

  • Valeant says California judge gives preliminary approval to Allergan settlement

    Economic CTV News
    LAVAL, Que. - Valeant Pharmaceuticals International Inc. says a U.S. District Court judge gave his preliminary approval Tuesday to a US$290-million settlement of lawsuits stemming from the unsuccessful attempted hostile takeover in 2014 of Botox maker Allergan Inc. Source
  • With a US$6B charge comes new thoughts about GE's future

    Economic CTV News
    BOSTON -- General Electric Co. is signalling it may undergo a more comprehensive transformation, a decade after breaking off substantial pieces of the multinational conglomerate in bid to a return it to its industrial roots. Source
  • Carillion Canada says it's soldiering on despite U.K. parent's financial woes

    Economic CBC News
    A spokesman for the Canadian subsidiary of insolvent British construction giant and state contractor Carillion says it's business as usual in Canada despite the parent company's collapse on Monday. Cody Johnstone says that Carillion Canada is not in liquidation and its 6,000 employees in Canada continue to be paid, along with its subcontractors and suppliers. Source
  • McDonald's sets worldwide recycling goals

    Economic CTV News
    NEW YORK -- McDonald's says it aims to use all recycled or other environmentally friendly materials for its soda cups, Happy Meal boxes and other packaging by 2025. The world's biggest burger chain also wants all of its 37,000 restaurants worldwide to recycle customer waste by that year. Source
  • Canadian natural gas industry a 'sad story': analyst

    Economic CBC News
    A prominent commodities analyst struck a gloomy tone as he delivered a blunt assessment of the Canadian natural gas industry's fortunes this year, describing it as a "sad story." In front of a few hundred oilpatch members at the Calgary Petroleum Club in the city's downtown, commodities analyst Martin King admitted his Tuesday morning presentation for gas was one of his most negative. Source
  • Nutrien to sell Israel Chemical stake for expected US$700 million

    Economic CTV News
    SASKATOON -- Fertilizer giant Nutrien Ltd. says it plans to sell all of its holdings in Israel Chemicals Ltd. in a secondary share offering for an expected US$700 million. The sale comes as one of the requirements set out by global regulators for Potash Corp. Source
  • Australia files WTO complaint against Canadian wine sales measures

    Economic CTV News
    TORONTO - Australia has filed a complaint about Canada's rules around wine sales with the World Trade Organization. The complaint filed Friday argues that Canada's distribution, licensing and sales measures discriminate against imported wine. Source
  • Beer Canada calls on feds to axe increasing beer tax

    Economic CTV News
    OTTAWA -- A trade association for Canada's beer industry wants the federal government to stop its plan to annually increase a tax on the alcoholic drink. Beer Canada has launched a new campaign calling on Canadians to sign a petition asking Finance Minister Bill Morneau to axe the escalating beer tax. Source
  • Instacart buy Unata as it plans Canadian expansion

    Economic CTV News
    TORONTO -- American grocery delivery service Instacart says it has bought Toronto-based technology company Unata to ramp up its expansion efforts across Canada. Instacart's chief business officer Nilam Ganenthiran says the acquisition gives the company access to Unata's digital flyer, loyalty, e-catering and list-building capabilities. Source
  • Australia complains to WTO about Canadian rules on selling wine

    Economic CBC News
    Australia has complained at the World Trade Organization about the rules applied to the sale of wine by Canada and various Canadian provinces, a WTO filing showed on Tuesday. "It appears that a range of distribution, licensing and sales measures such as product markups, market access and listing policies, as well as duties and taxes on wine applied at the federal and provincial level may discriminate, either directly or indirectly, against imported wine," Australia said. Source