On Thursday, the Nasdaq fell 3 percent and the Dow dropped by 390 points (2.3 percent). Meanwhile, the S&P 500 decreased by 2.4 percent. Amid the stark drops in the stock market, investors were reeling from news that the Chinese stock markets had closed for the second time in the same week. After the Chinese markets dropped by 7 percent in the first hour of trading, it was automatically shut down.
In the last year, Chinese stocks have shed 13 percent. News of the most recent crash caused global equities in Japan and Germany to fall by 2.3 and 2 percent, respectively. As news of a weak Chinese manufacturing report hit the markets earlier in the week, concerns about the second-largest economy have only grown. In the wake of these concerns, the question on everyone’s lips is if solely China is responsible for the latest sell-off.
The Chinese Role in the Markets
Presently, Chinese is in a transition from a manufacturing economy to a consumer economy. As it makes the transition, there are some obvious adjustment issues. Since China buys their raw materials from emerging nations, a drop in the Chinese economy could have an effect on the global economy.
Experts have placed much of the blame on the current market situation on the Chinese authorities. The Chinese sharply devalued their currency this week. To the markets, this appeared to signal a lack of confidence in the Chinese economy and a need to bolster the markets. The government’s intervention in the markets to buy shares on Tuesday only furthered this impression.
China Is Not the Only One at Fault
Although the Chinese stocks and economic data remain a concern, the larger problem is in the United States. As the former president of the Dallas-based Federal Reserve branch pointed out, the continued quantitative easing measures of the last decade have lasting repercussions. Although the initial rounds were needed to bolster the United States economy, maintaining a zero percent interest rate front-loaded the equity markets.
In essence, the additional rounds of quantitative easing allowed the markets to enjoy the prosperity and equity growth of tomorrow early. This means that the economy may be finally paying back the interest rate boost that it was given in the last decade. As the situation begins to stabilize, the markets will gradually even out.
Judging from the Federal Reserve documents that were released on Wednesday, it appears that the central bank will be cautious about raising interest rates in the near future. This will help to provide some support over the coming year as China’s slowing economy stabilizes. In the near future, the European economy is more likely to feel the fallout from China due to their closer dependence on Chinese markets.