Chinese stocks tumble for a second day

After Global Fall. Chinese stocks have plunged for a second day after worries over China’s slowing growth triggered a global sell-off.

The Shanghai Composite, China’s main stock exchange, fell 7.6% on Tuesday – after losing 8.5% on what state media have called China’s “Black Monday”.

It was the worst fall since 2007 and caused sharp drops in markets in the US and Europe

Tokyo’s Nikkei index had a volatile day, closing 4% lower.

A woman holds her son as she looks at the national flag made up of 100,000 carnations at Wuling Square 25 September 2007 in Hangzhou, China.

The repercussions from “Black Monday” – the global markets turmoil caused by a plunge in Chinese stocks – continue to be felt on Tuesday.

To the uninitiated, the situation may seem bafflingly complex, here’s a breakdown of the issues:

China

The story of China has been one of extraordinary growth in the last decade, but there have been recent concerns that there will be a significant economic slowdown.

One worry is that this would trigger panicked reactions from domestic investors and lead to a stock market crash.

With China establishing its Shanghai stock exchange only in 1990, its market is considered immature compared to the rest of the world.

Investors monitor screens showing stock market movements at a brokerage house in Shanghai on 13 August 2015. — Image captionChina’s stock market is dominated by small-time investors

The shares are almost entirely owned by domestic traders, many of whom are ‘mom and pop’ investors with little experience in investing.

The lack of large, experienced and professional organisations as investors means that the market can be much more volatile.

Central bank

Over the last few months, China’s central bank has been repeatedly propping up the stock market to ensure stability.

They have been doing it through several big measures, such as cutting central bank interest rates – which allows more money to flow easily – and buying up shares to stop them from falling.

After losses last week, there was an expectation on Friday that there would be yet another such drastic move.

But that did not happen – causing panic to ripple out and a dramatic drop in shares on Monday. The stock market saw its worst single-day plunge since 2007.

Currency

One of the possible triggers for the drop in past trading sessions was the earlier decision by the central bank to devalue the yuan and allow it to trade more flexibly.

Unlike most currencies, the Chinese currency is not allowed to trade freely according to the number of buyers and sellers in international markets.

Rather, the central bank sets a daily rate to the US dollar and for the rest of the day, the yuan is allowed to trade 2% up or down from that rate.

Yuan and dollar notes — Image captionHow many yuan you get for a dollar is crucial for exports

Earlier in August, the bank cut that rate by almost 2%, sending a first wave of insecurity through markets. The move was seen as an attempt to help exports by making Chinese goods cheaper abroad.

The central bank also said it would set the daily rate based on how the yuan traded the previous day, which means that it could fall a lot further in future.

Contagion

China’s stock market slump caused investor uncertainty to spread across the region and then around the globe, destabilising stock markets in New York and Europe.

A trader works on the floor of the New York Stock Exchange (NYSE) on 24 August 2015 in New York City. — Image captionThe New York Stock Exchange suffered heavy losses on Monday

This knock-on effect has highlighted how much of a linchpin China’s stock market is in the global marketplace.

Hong Kong-based investment analyst Peter Churchouse says China’s market was “irrelevant” 35 years ago and as recent as a decade ago, it merely followed trends in the global economy.

But now the tables have turned, he says. “The global economy and global markets have a ‘Made in China’ label on them.”