The chinese stock market was an envy of the investors. It grew at an extraordinary rate of 50%in last one year racing to a high of 5166 on june 12 this year. However, on August 24, 2015, the shanghai composite (stock Market index) crash to 3000 dipping by around 40% in two months, causing a loss of around $4 trillion dollars to the investor (which around the Rs.260 lacs crores). Just think what these means; even the total GDP of india is around half of it; i.e. around $2 trillion dollars. The richest man in china, wang jianlin is said to have lost more than US $13 billions in the process.
The steep fall in chinese share market had its ripple effect. The indian share market also suffered heavy loss of more than 7 lac crore rupees in just one day. The dow jones, the american share market index also lost more than 1000 points, its worst fall since 2011 in one week.
Reasons: The main reasond behind the landslides are: 1.Slowing economy: The Chinese economy constitutes around 15% of the world economy and any slowdoewn in their economy not only effects only them but also the manufacturinug and the trading world that is dependent on their economy. The slow down will mean that china will buy less of gold, silver, or other products it sources from across the world, thus affecting other economies as well.
2.Exrberance of the investors: People borrowed money to invest in the share market expecting high returns, which did not materialise. The same kind of enthusiasm in the real estate market had led to the 2088 crisis, when the losses exceeded US $7 trillions. The people were borrowing money to buy property with the expectation of selling the same later at a higher rate. But whrn there were no buyers, the market crashed like a house of nine pins, singeing the entire financial system. The process of making investements with the borrowed money is known as leverage and in china it had reached a ratio of 40:1, meaning even a loss of 2.5% will wipe out the capital of the investors. Initially, the government reacted by restricting the trading and banning short selling. But later, when the things did not stabilize, Chinese government reacted by devaluing its currency, yuan which had its own effects on the currency markets around the world. Many world currencies have came under stress, some losing 50% of their value vis. a vis. US dollar. This devaluation has raised concern as other countries may also be forced to devalue their currency to compete with the Chinese goods which have now become cheaper to buy. Many Asian countries had been trading in Chinese currency and it is said that the devaluation of yuan has increased debt by around US $16 billion. Already, some economists are terming the step as "currencywar" which had caused the great depression of 1929.
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