The Chinese stock market is unique among all others in the world. Because China is such a large global player, any fall it takes can be felt beyond its borders, especially if it is related to the stock market and it’s economy.
The Chinese stock market is one of the only markets that depends on its citizens, foremost, the individual retail investors instead of institutional investors. Retail investors are people like “Jack and Jill,” your next door neighbor’s grandmother, or the concierge you pass in your lobby on your way to work each morning.
These individual investors buy and sell securities for their personal accounts, and not for another company or organization.
In addition to that, China’s economy overall is tied to its export-volume, which grows and shrinks according to that volume. Aside from being the largest exporter of agricultural products, machinery, and vehicles to the U.S.. which amounts to $122.1 billion, China is also the biggest importer to the U.S., with revenues totaling about $440.4 billion. China’s imports from the U.S. make up about 8 percent of the Standard & Poor’s 500 index revenue.
On top of all of that, China owns the majority of U.S. debt in the form of U.S. treasury bills, bonds, and notes, which added up to roughly $1.224 trillion in February 2015.
A tight grip on the market
Unlike the U.S. stock market, the Chinese stock market is controlled by its government. In the eyes of investors, this makes the Chinese Government directly responsible for the market’s stability.
On top of that, most Chinese investors buy more stocks than they have cash for by borrowing money and trading on a margin. In return, this causes stock market crashes whenever companies start tripping and investors aren’t able to meet their margin. Should the economy decline or seem to fall into a recession, the Chinese employment rate would drop too. As a result, China would also import less internationally. Thus, any revenues the U.S. makes from exports to China would shrink too, because the Chinese demand for U.S. imported goods and services would have declined.
Unlike in Western economies, in China, the government determines the interest rates and not the market.
So basically, the cost of money on both deposits and loans is determined by the Chinese government. By setting them both artificially low, the government shifts wealth from it’s savers to its borrowers. The more money gets pumped into the system, the more it’s borrowers benefit.
According to an article on Investopedia, the Chinese government used it’s power to intervene when the market began crashing in August of 2015. The intervention included temporary banning of short selling, with the possibility of arrest for those who tried to make a profit on the sinking stocks-titanic.
Inter dependency a blessing or a curse?
Any revenues the U.S. makes from exports to China would decline if China’s demand for imported goods and services would shrink.
One of the largest risks the U.S. might face is losing its grip on its interest rate. China owns the majority of U.S. treasury bills, bonds, and notes.
A crash in the Chinese stock market could push the Chinese government to start selling these securities to reduce its own debt. That would make the U.S. dollar drop right away, and prompt the Federal Reserve to increase the interest rate to reduce any harmful effects.
However, if the domestic interest rates would suddenly go up, a burst of inflation would be triggered. Goods and services from the U.S. would become increasingly more expensive, while the buying power of the U.S. dollar would become increasingly weaker, bad news for anybody depending on selling their goods and services to the U.S.
The stock market might seem like a good place to make a quick buck, and often it is, but it’s also like playing with fire next to a stack of dry hay in a forest somewhere in California when it’s drought season.