Stock markets across the world have tumbled today as a panic selloff has begun in response to a weak Chinese stock market.
As the trading day closed across Asia and then Europe, markets in the United States join in the selloffs, with a low in Standard & Poor’s 500 Index approaching a 2011 low as global worries mount.
The ongoing market falls in China are of concern not only due to their global financial repercussions – but they are also a test of the Chinese Communist Party’s ability to remain in control.
The market crash began with the burst of a stock market bubble in June 12th 2015. Unlike most economic bubbles, the main investors were not large banks or holding corporations but everyday citizens who had been encouraged to invest. Initially, the Chinese government launched investigations and order people not to sell shares. However, these measures did not prevent a further tumble in the market, nor did they satisfy investors’ fears.
Stock Market Communism?
A global selloff today was likely sparked by the inability of the Chinese government to control the stock market. A fall in Chinese stocks, especially when owned largely by ordinary people, could lead to a fall in consumer confidence, weakening demand. This in turn could lead to less demand for commodities like oil and metals, which are produced by large multinational companies. Consequently, confidence is lost in their ability to perform.
China also maintains tight control of its currency. The Chinese Communist Party sets the exchange rates for the Yuan, giving it a say in how much the currency is worth at any given time. It has recently been devalued, which makes Chinese exports appear cheaper to other countries. This has led to fears in Europe that the slow recovery in Eurozone countries will be hampered, as their exports will appear less competitive.
The Chinese government wants to halt, and ultimately reverse this downward stock market trend for two reasons. Firstly, to regain economic growth and market confidence. But in a land where the single party must be seen as ultimately in control, the Chinese Communist Party must prove it can deal with capitalist market forces if it is to retain its status.