Chinese stocks fell 8.5% on Monday and Chinese authorities are left trying to find what responses they can make to buoy markets. This drop marks the largest fall for Chinese markets in almost 8 years tracing back to the financial crisis.
The immediate cause of this drop was an anticipated lower growth as a result of manufacturing data that came in lower than expected according to Susan McGalla. However, there are many long term reasons for the decrease in Chinse stocks.
Up to a month ago, Chinese stocks had risen 150%, falling sharply by 30% last month before markets recovered as a result of governmental intervention. This governmental intervention was in the form of limiting major investors in selling stocks, loans to certain critical companies, and other minor controls. Critics indicated that these moves were short term benefits but would not have a lasting impact on stocks.
Three are approximately 50 million retail investors in the Chinese stock market which represents only a sliver in the overall population of 1.5 billion. As the wealth of Chinese citizens becomes more pronounced, increased market participation is expected. This should support markets though expectations for growth will likely need to temper further before the Chinese markets recover.
The move down in Chinese stocks has led to further weakness in oil and other commodities including metals, all of which are strongly correlated to the Chinese market. Further weakness in Chinese stocks is not expected to be contagious to Western markets, though weakness in the underlying Chinese economy could harm Western markets significantly. As such many western traders will be paying close attention to how the Chinese government reacts to this latest downturn.