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. 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 >>
  2. 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 >>
  3. Who or what is Dow Jones?

    Dow Jones is one of the largest business and financial news companies in the world. It owns owns the Dow Jones Industrial ... Read Answer >>
  4. What's the difference between the Dow Jones Industrial Average and the S&P 500?

    The DJIA is a price-weighted average of 30 stocks whereas the S&P 500 is a market value-weighted index of 500 stocks. Read Answer >>
  5. Is the Dow Jones a stock exchange?

    Learn about the Dow Jones Industrial Average and its impact. This historically significant index provides a daily snapshot ... Read Answer >>
Related Articles
  1. Insights

    5 Things to Know About the Chinese Economy

    China's once fast-moving economy has slowed in recent years, but it still has a lot of room for growth.
  2. Investing

    What China Devaluing its Currency Means to You

    The Chinese government is showing its craftiness in managing its money supply, but will it make a difference? And what does it mean for U.S. investors?
  3. Insights

    A History Of Wall Street Profitability

    Learn about the performance of the Dow Jones Industrial Averages (DJIA) through the decades.
  4. Investing

    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.
  5. Financial Advisor

    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.
  6. Investing

    Problems Loom For The Chinese Economy

    In 2010 China became the world's second largest economy, yet some analysts see problems ahead. Find out why.
  7. Investing

    Chinese Companies Are Leaving U.S. Markets

    Chinese companies are pulling out of U.S. exchanges and that may be a good thing.
  8. Investing

    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.
  9. Financial Advisor

    Why When China Sneezes the U.S. Catches a Cold

    The size and breadth of the Chinese economy will naturally affect the U.S. Making clients aware of it can help manage portfolio expectations.
  10. Insights

    What China's New Policy Means for Business

    Now that China has eliminated its one-child policy, how will the new policy impact businesses?
RELATED TERMS
  1. SSE Composite

    The SSE Composite is a market composite made up of all the A-shares ...
  2. Dow Jones Industrial Average (DJIA) Yield

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

    A reverse movement, usually negative, of at least 10% in a stock, ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest ...
  5. Stock Market Crash Of 1987

    A rapid and severe downturn in stock prices that occurred in ...
  6. Hot Money

    1. Money that flows regularly between financial markets as investors ...
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  3. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  6. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
Trading Center