A:

On February 27, 2007, the Chinese stock market suffered a correction, causing choppy markets all over the world. The Shanghai Stock Exchange (SSE) lost 9% of its value and uncertainty caused the Dow Jones Industrial Average (DJIA) to dip 416 points.

China's move toward capitalism started in the 1970s. However, it didn't achieve critical mass until the 1990s, when the country began to see rapid growth in both production and consumption, as citizens of the world's most populous country benefited from an improved standard of living. The Chinese economy continued to heat up in early 2000 as more large players, like mutual funds, poured money into the business sector. With so much money flooding into China, there was increased incentive for companies to go public. Companies already trading in the Chinese market were doing so at many times their earnings, as investors rushed in to join the action. On top of the global interest, the number of Chinese investors buying into the market drove prices steadily upward.

The Chinese government began to worry that the country's economy was heating up too fast and that inflation was becoming harmful. Although no solid action was taken, rumors of a government clamp down on the increasingly loose economic policies shook investor confidence. The SSE composite index shed 9% of its value and a sell-off ensued. The number may seem small, but 9% represented hundreds of billions of dollars that vanished in a single trading day.

The integrated global economy meant that market correction in China impacted the rest of the world. The DJIA and other major indixes all fell with the SSE. Although the market correction leveled out before a panic or mini-crash could occur, its global impact served as foreshadowing of the more severe global impacts that would follow the subprime loan crisis later in the year.

Check out our related articles: Investing In China and Why Country Funds Are So Risky.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. What does the Dow Jones Industrial Average measure?

    Learn about what the Dow Jones Industrial Average measures and discover the meaning of changes in this important and widely ... Read Answer >>
  2. What emerging markets are best suited for getting the most exposure to the industrial ...

    Discover which emerging markets are best suited to gain exposure to the industrial sector. China is the largest variable ... Read Answer >>
  3. How many components are listed on the Dow Jones Industrial Average?

    Learn how many components comprise the Dow Jones Industrial Average and understand the stock index's origins and how it is ... Read Answer >>
  4. Where can I find all of the stocks in the Dow Jones Industrial Average?

    The best place to find a list of all thirty stocks included in the Dow Jones Industrial Average (DJIA) is the "Historical ... Read Answer >>
  5. Is the Dow Jones a public company?

    Find out how the Dow Jones Industrial Average tracks the health of the U.S. economy. This fluctuating number indicates the ... Read Answer >>
  6. What is the difference between the Dow and the Nasdaq?

    Because of the way people throw around the words "Dow" and "Nasdaq," both terms have become synonymous with "the market," ... Read Answer >>
Related Articles
  1. Markets

    Is It the Right Time to Invest in China?

    A crash in August and a partial recovery thereafter. What's driving China's markets, and are Chinese investments still a good bet in the long run?
  2. Markets

    The 2000 Nasdaq vs. The 2015 Shanghai Composite: How History Repeats Itself

    The Shanghai Composite is in a correction, and it's very similar to the NASDAQ of 2000.
  3. Markets

    Deconstructing The Chinese Stock Market

    China's stock market was in the news this week for its wild swings. What caused the swings and will they have a material impact on US stock markets?
  4. Markets

    5 Things to Know About the Chinese Economy

    China’s economy has been a big deal for a while now having grown at an average of 10% since beginning the implementation of free-market reforms over 30 years ago. In case you didn’t know, here ...
  5. ETFs & Mutual Funds

    Where Do Chinese Equities Go from Here?

    Is it time to go long or short on Chinese equities?
  6. Markets

    How the Chinese Stock Market Heavily Affects the US

    Learn about the ways in which the Chinese stock market affects the U.S. economy, the dollar, the interest rate and imports and exports.
  7. Markets

    The 3 Industries Driving China's Economy

    Read an analysis of the Chinese economy and its major sectors, particularly after a series of pro-market reforms took place in China in 1978.
  8. Markets

    How China's Economy is Now Like America's

    China's economy could take the global economy down with it; why that might be good news in the grand scheme.
  9. Markets

    Can the Tech Sector Save the Ailing Chinese Economy?

    The tech sector has been the sole winner in the declining Chinese market. Does it have the potential to sustain the momentum, and can it save the Chinese economy?
  10. Markets

    4 Ways China Influences Global Economics

    Learn the four ways China's economy can influence the global economy. The recent decline in Chinese stock markets should be the least of your worries.
RELATED TERMS
  1. SSE Composite

    A market composite made up of all the A-shares and B-shares that ...
  2. Dow Jones Industrial Average (DJIA) Yield

    The aggregate dividend yield on the 30 stocks that make up the ...
  3. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) ...
  4. Dow Jones 65 Composite Average

    A composite index that measures changes within the 65 companies ...
  5. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average ...
  6. Market Index

    An aggregate value produced by combining several stocks or other ...
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center