China Stocks Collapse As Sell-Off Again Spreads Worldwide

China Stocks Collapse

China stocks continued to plunge on Monday, hurting other Asia markets and sending Dow futures down over 400 points before the trading day begins in New York.

The benchmark Shanghai composite index was down 8.5 percent at the close of trading Monday, nearly 40 percent lower than its June high. Chinese media is calling it “Black Monday,” according to Business Insider. All of the gains built up to that point earlier in the summer have now been wiped out.

Markets in Hong Kong also fell and Japan’s Nikkei was down almost 5 percent. The chaos spread westward, where London’s FTSE 100 dropped 2.22 percent and Germany’s DAX was down 2.15 percent. An index of European blue chip stocks, the Euro Stoxx 50, was also down by 2.1 percent.

Meanwhile, American markets braced for another shock after big dips last week. The Standard & Poor’s 500 lost 3.2 percent Friday and the Dow Jones dropped by more than 500 points, capping a worrying week but not the run of losses. S & P 500 and Dow futures were both trading sharply down just hours ahead of Monday trading.

Much of the sell-off can be attributed to fears over China’s declining economy and a summer of bad news out of the country, including stock dips earlier this summer and Beijing’s inability to halt the decline. Poor numbers on China’s exports and manufacturing sectors have also spooked investors. The renminbi devaluation earlier this month, while ostensibly tied to China’s desire to see it become a global reserve currency, stoked global fears of a currency war and convinced many analysts that officials in Beijing were grasping at straws to right the economic ship.

Adding to uncertainty in the United States is speculation about what Federal Reserve officials will do when they meet next month. Interest rates have stood at rock-bottom for seven years, and with many indicators showing a recovering economy an increase seems overdue. But concern over very low inflation and China could delay a Fed move, lest markets become further roiled.

But analysts have also pointed to high valuations over the past few years that might not have been accurate reflections of corporate and economic health. While numbers in the U.S. have looked better, profit figures have not necessarily been robust enough in many cases to justify the sky-high levels markets have reached. And in China, government officials have encouraged rabid investing by many people who had to borrow their way into the game.

“We see this as a very nasty correction, not the start of a new bear market,” Philippe Gijsels, of Brussels-based BNP Paribas Fortis Global Markets, told the New York Times.

Written by Gene Giannotta

Gene Giannotta is a writer based in Washington, D.C. He reports on economic policy, finance and business news.