Chinese Decline Affects Global Markets

Chinese Decline Affects Global Markets

China’s market slipped on Tuesday after Beijing made an effort to temper the risks surrounding the nation’s high debt.

Chinese Decline Affects Global Markets
Chinese Decline Affects Global Markets

At a summit in Beijing this week policymakers are expected to indicate there will be a period of sluggish economic growth – a result of years of amassing debt to drive higher growth.

The benchmark Shanghai Composite Index dropped 5.4% for its sharpest decline since 2009. China’s stock market had raced forward in the last few weeks to become the top performing index worldwide, so the recent loss was particularly jarring.

“The new rule is to prevent risks from building up further as a result of high leverage in the market,” Xu Hanfei, analyst at Guotai Jun’an, told MarketWatch.

China’s structural reforms center on a lower reliance on debt. The hope is that the rapid, risky expansion of recent years will give way to slower, steadier, more stable growth.

Global markets react to China’s move
Stock indices across the globe fell as a result of China’s fiscal reform, according to The Wall Street Journal. Political unease in Greece contributed to global economic concerns. The Stoxx Europe 600 lost 1.6%. In the US, stocks opened lower across the board. The Dow and S&P 500 fell 0.9% while the Nasdaq dropped 1.1%. Today’s drop in the US followed significant losses on Monday despite seven consecutive weeks of gains from the Dow and S&P 500.

“China seems to be tightening the funding screws in the name of financial transparency,” John Brady, managing director at futures brokerage R.J. O’Brien & Associates, told The Wall Street Journal.

In Greece, the government decided on a parliamentary election for president two months ahead of schedule on December 17. The news came on the heels of eurozone finance ministers’ decision to extend Greece’s financial bailout talks into 2015. A Greek debt crisis in 2012 led to concerns over the eurozone’s reliability and global markets declined. Investors are concerned a similar outcome might be looming.

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