Why is China’s stock market falling?

‘Black Monday’ chaos sees billions wiped off markets around the globe
What has happened in China?

China’s stock market has fallen sharply over recent weeks despite measures by officials in Beijing aimed at calming investors’ jitters and shoring up global confidence in the country’s slowing economy.

Shares in China had soared 150% in the 12 months to mid-June as individual investors piled into the rising market, often borrowing heavily to do so. But chiming with warnings that shares were overvalued and the signs of an economic slowdown, the momentum came to a shuddering halt when shares hit a seven-year peak.

Following another plunge on what was dubbed “Black Monday”, China’s stock markets have now given up all their gains for the year.

China’s shock move to devalue its currency, the yuan, this month only served to intensify worries about the world’s second-largest economy.

What has happened on other markets?

Shares around the world followed China’s stock markets lower. About £74bn was wiped off the value of the FTSE 100 and on Wall Street, the Dow Jones Industrial Average slumped by a record of more than 1,000 points at one stage.

Commodities such as crude oil and copper have also tumbled to multi-year lows as investors take fright over signs of waning demand in the world’s leading consumer of raw materials.

The currencies of emerging Asian economies have weakened as investors drop those assets seen as riskier to hold. But investments perceived as safe havens in times of trouble, such as gold and some government bonds, are in demand.

Is this a repeat of the 2008 global financial crisis?

Some of the falls on stock markets are certainly reminiscent of the swings seen around the time of the collapse of the US bank Lehman Brothers. The FTSEurofirst 300, a pan-European share index, suffered its biggest one-day drop since late 2008, losing 5.4%. For Shanghai’s composite index, Monday’s 8.5% slump was the biggest since February 2007.

But some economists say the parallels stop there. They see limited risk to China’s real economy from the stock market turmoil and little to be worried about beyond China.

Julian Jessop, the chief global economist at the consultancy CapitalEconomics, said: “The current panic is essentially ‘made in China’. The recent data from other major economies, including the US, eurozone and Japan, has generally been good … Aside from the bad news from China, there is very little to support fears of a major global downturn.”

But others are less sanguine. They point out that China’s slowdown is just one of many factors worrying investors alongside lingering political problems in the eurozone, signs of weaker global growth and vast sums flowing out of fragile emerging markets such as Brazil. Furthermore, policymakers apparently have few tools left to help.