China Triggers Global Market Bloodbath

Shanghai River

Photo by Michael Bush for Thursday Review

China Triggers Global Market Bloodbath
| published August 24, 2015 |

By Thursday Review staff

Yet another calamitous day on the troubled Shanghai market has triggered a big round of selloffs around the world. China’s stock market opened early on Monday to a massive slide—down 8.5 percent in one day of hectic trading, and yet setting the tone for another horrible day for Asian markets in general. China’s markets have been in meltdown mode for weeks now, and the blowback is now damaging other markets around the globe.

Beijing has attempted a variety of short-term and long term fixes, including pumping billions of dollars into the markets, halting or otherwise limiting short sellers, and even devaluing its currency in a desperate attempt to stanch the flow. Little has helped to slow the selloff as the big investors sense that China’s long bubble has burst, and as millions of smaller investors seek to cut their losses.

On Monday, the Dow plunged by 1089 points in early morning trading, sending shudders through markets worldwide and tremors across the U.S. as fears of another recession briefly swept through Washington and Wall Street. U.S. stocks recovered slightly, as bargain hunters began to buy up investments at low prices, but Wall Street still ended up down 588 points. The hardest hit U.S. stocks were oil companies and energy firms, which are now facing oil prices likely to fall even farther as China’s industrial sector slows to a virtual halt.

The overall drop has been the worst for Wall Street in more than four years, as U.S. business analysts and investors try to figure out how much of U.S. stocks are interconnected with the falling value of China’s stocks. Confusion on Wall Street and on other markets tended to fuel the selling.

Many economists had warned that China’s economy was at the edge of recession, built too largely upon lavish real estate investments, high rise luxury housing, and millions of square feet of empty office space—all of it built in anticipation of extremely high expectations of growth. Those hyper-optimistic models of Chinese growth have turned sour, causing a stampede as investors inside China dump stocks—even in sectors like technology which are not considered closely linked to real estate.

Even energy companies have taken a beating in China as industrial growth slows rapidly, reducing demand for oil, gas, and other energy sources—an ironic twist as oil prices continue to fall worldwide on news of overflowing reserves and increased output by Saudi Arabia, Iraq, Iran and a dozen other countries.

Fears that the Chinese economy might be in the early stages of a massive recession are spooking investors in Europe, South America, Asia, and in the United States. The complexity and interconnectedness of the global marketplace means that China’s meltdown may—or may not—have critical links into markets in Tokyo, London, Sao Paulo, and New York. Brazil’s Bovespa Stock Index was down nearly 3%, the Santiago (Chile) Index down 2.25%, and Mexico City’s IPC market down more than 1.5%. Hardest hit were Germany’s DAX, which was down 4.7 percent, and Hong Kong’s Hang Seng, which closed down 5.45%.

China’s month’s long meltdown took its toll on Wall Street last week as the NYSE and the Dow wiped out all the gains made in all of 2015, punching a deep hole in retirement investment accounts and erasing even the brief optimism raised by better-than-expected jobs reports.

Two weeks ago, Beijing attempted several tough fixes to try to halt the declines, including introduction draconian rules for short sellers, though many market analysts outside of China saw the short-seller “crackdown” as a red herring. In mid-August, Beijing devalued the yuan in an attempt to attract buyers of government bonds, but the move not only failed to halt the slide, but may have triggered even more selloffs around the world. Many analysts who watch Asian markets closely say that for tens of millions of average investors in China, confidence has long ago evaporated as the real estate bubble burst and small investors move their money into savings accounts or cash.

China is the world’s second biggest economy, and the worry in the U.S. is that if China falls into recession, the crisis could quickly spread into scores of other economies in Asia, Europe and South America, spurring a repeat of the last big recession—a long market downturn which began with the U.S. mortgage and real estate meltdown in 2008.

Though many sober analysts point out that China’s market was long overdue for a major correction, and that China’s economy will no doubt recover from this current crash, it is little solace for those who are watching their investments in U.S. and European companies erode as China’s losses continue to mount.

Related Thursday Review articles:

China Devalues its Currency; Thursday Review staff; Thursday Review; August 12, 2015.

Chinese Stocks Slump Across the Board; Thursday Review staff; Thursday Review; July 27, 2015.