Last Thursday, trading in Chinese stocks was halted for a second time in 2016 by the newly implemented circuit breaker system. The CSI 300, an index that evaluates trade in major Chinese cities like Shanghai and Shenzhen, uses a newly implemented circuit-breaker to halt the day’s trading if the stock index falls seven percent in one day, hoping to settle China’s recently volatile economy. It was also activated on Monday of the same week.
The recent events birthed the ominous prospect of a financial crisis similar to that of 2008. These two major plummets have capped a horrific start to the Chinese economy in 2016 where the index has already gone down by a whopping sixteen percent. In response, the China’s central bank pledged to pump $10.6 billion into the economy to promote economic growth, a sign that top Chinese officials fear an oncoming financial panic.
Analysts and observers of international markets have many different theories as to why the Chinese Economy is faring so poorly. The rapid devaluation of the Yuan, furthermore, has been troublesome since the government purposely devalued it last August to make exports more appealing. Since that point, the Yuan has lost 6% to the US dollar and is now at its lowest point since March 2011.
Most prominent is the long-term decline expected of the overvalued market. Since the bull markets of 2014, China’s stock market reached unprecedented heights in investment; 80% of those investors were individuals. The slowdown of China’s manufacturing led to a dip in growth, but this one was devastating because inexperienced individuals panicked and backed out. To compensate the Chinese government began funneling money into the market, leading to a positive feedback loop.
The troubles within China’s economy have lasting effects on the economies of many other world powers who depend on the stability and growth that China usually provides. China is home to the world’s second largest economy, and any turbulence, consequently, has the potential to dramatically disrupt international markets. In response to the plunge last Thursday, Hong Kong’s Hang Seng dropped 3.1%, while Japan’s Nikkei shed 2.3% and U.S. stock futures were sharply lowered.