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. Why would a company decide to utilize H-shares over A-shares in its IPO?

    A company would decide to utilize H shares over A shares in its initial public offering (IPO) if that company believes it ... Read Full Answer >>
  2. Do negative externalities affect financial markets?

    In economics, a negative externality happens when a decision maker does not pay all the costs for his actions. Economists ... Read Full Answer >>
  3. What is the difference between disposable and discretionary income?

    According to the Bureau of Economic Analysis, or BEA, disposable income is the amount of money an individual takes home after ... Read Full Answer >>
  4. What are the major laws (acts) regulating financial institutions that were created ...

    Presidents George W. Bush and Barack Obama, in conjunction with Congress, signed into law several major legislative responses ... Read Full Answer >>
  5. What are the similarities and differences between the savings and loan (S&L) crisis ...

    The savings and loan crisis and the subprime mortgage crisis both began with banks creating new profit centers following ... Read Full Answer >>
  6. What measures could the U.S. Government take to prevent another crisis similar to ...

    Some of the measures that the U.S. government can take to prevent another crisis similar to the savings and loan (S&L) ... Read Full Answer >>
Related Articles
  1. Forex Education

    China's Devaluation of the Yuan

    Just over one week ago the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the yuan, knocking over 3% off its value.
  2. Markets

    Moral Hazard in the Chinese Market

    The Chinese government faces the issue of balancing its desire to maintain stable markets through manipulation with the danger of a looming bubble if stock prices run up too much.
  3. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  4. Investing News

    U.S. Stock Markets Rebound

    After a string of losses in the past week amid declining oil prices, economic slowdown in China, U.S. and timing uncertainty interest rates hike by Fed, US Stock markets came back with a bang ...
  5. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  6. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  7. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  8. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
  9. Investing

    Chinese Stock Market Ban Hurts Production

    Late June saw the beginning of a nearly $4 trillion rout of China’s stock markets that triggered a panicked Chinese government to intervene.
  10. Economics

    Is the Yuan a Yawn or a Nightmare for Investors?

    China’s decision to change the method of setting its currency exchange rate caused global shock waves last week.
RELATED TERMS
  1. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China ...
  2. Regional Asset Liquidation Agreement (RALA)

    An agreement between an asset manager and the Federal Deposit ...
  3. The New Deal

    A series of domestic programs designed to help the United States ...
  4. Accelerated Resolution Program (ARP)

    A program designed to reduce the time and cost of resolving failed ...
  5. Asian Infrastructure Investment Bank (AIIB)

    The Asian Infrastructure Investment Bank (AIIB) is an international ...
  6. Asia-Pacific Economic Cooperation (APEC)

    Asia-Pacific Economic Cooperation (APEC) is a 21-member economic ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!