Why the Drop in the Chinese Stock Market Might Impact Global Markets

Chinese Stock Market

Shanghai Financial Center

The continuous drop in Chinese Stock Market has global markets on edge and for a very good reason. Even though the Chinese stick market are a small percentage of the Chinese economy the continuous drop might signal that the Chinese economy might be in worse shape. This would not bode well for the global economy as China now represents the world’s second largest economy. This situation also may hurt the Communist Party as well. For years the one thing that the Chinese Communist Party could point to as a success was the growing Chinese economy. It was a unique situation as the government maintained a great deal of control over the economy and especially the Financial Markets. When markets were not behaving the Chinese Government would step in and prop things up where it was needed.

In the past, the government involvement seemed to work and provided a level of confidence to the global markets. Now with all of the government intervention in the Chinese Stock Market, nothing seems to be working and the government’s involvement may actually be making a bad situation worse. Some of the underlying problems may now be evident that the Chinese Equity Markets may be at a level that cannot be manipulated anymore. It is also not necessarily a good thing that sate run media has been promoting the benefits of stock ownership without providing a balanced view of the risks as well.

Another problem that faces China is that there is no one individual that can calm the markets like the head of Federal Reserve or the ECB. In times of market turmoil in Europe and the United States, the heads of these central banks could help calm markets with talk that could be backed up with lowered interest rates. The Communist Government and way too much bureaucracy are getting in the way of the Bank of China offering out a coherent response or strategy.

Unlike other major Equity Markets the Chinese Stock Market is driven by the retail investor. This is another reason why there has been so much volatility and panic. In the US and European markets, the dominant players are institutional investors and have the experience and staying power to sustain through down markets. The Chinese Market will need to mature at some point and will need to have less involvement on the part of the government. This will lead to greater confidence and a better standing on the world’s financial stage.

 

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