China’s stock markets are suffering from massive volatility and investors are running scared. If you’re just catching up to it, here’s what you need to know. Last updated: July 27, 5:30 am ET (9:30 am GMT).
1) The bears are back, and with a vengeance. The benchmark Shanghai Composite shed 8.5% Monday, its worst percentage drop in a day since 2007.
2) This is terrible news for officials in Beijing, who have been trying desperately to support stocks. Markets had enjoyed two weeks of relative calm before Monday’s trading session.
3) The root cause of all the turmoil: Over the past year, investors poured more and more into Chinese stocks, even though economic growth and company profits were weak.
4) Retail investors — think mom and pop, average folks — were the most enthusiastic. A classic bubble developed.
5) The bubble popped on June 12, and the Shanghai index lost about a third of its value before rebounding. Losses were even more dramatic on the the smaller Shenzhen Composite.
6) China moved aggressively to control the crisis. The government gave money to brokerages to buy stocks — and ordered company executives not to sell their shares. New company listings were suspended. The central bank cut interest rates to a record low.
7) Regulators and security officials launched an investigation into illegal short selling — borrowing stocks so you can sell them in the hope they fall — and rumor mongering. Only approved brokers are allowed to engage in short selling in China.
8) But take a deep breath. Foreigners own just 1.5% of Chinese shares, so your portfolio is unlikely to be affected. Still, economists are worried that stock losses will ripple through China’s economy, and take a bite out of consumer spending. Already, gold and copper prices have been affected.
9) The government’s goal is to minimize damage to the real economy. So far, the country’s banking system is holding up well, and Beijing still has additional policy tools at its disposal.
10) However, there are early signs of weakness spreading through China’s manufacturing sector. That’s something Beijing will be watching very closely.
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