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.

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