From VOA Learning English, this is the Economics Report.
The last two months have been difficult for investors in China’s stock markets. Major stock indexes, measures that track share values, all had big decreases during the month. This has many people questioning what China’s stock market problems mean for its economy and the world.
On July 27th, the Shanghai Composite index dropped more than eight percent in value, its largest single-day drop in eight years. In recent weeks, prices dropped although the government put a number of measures in place to keep prices from falling too far.
Measures to stop falling prices
These included lending billions of dollars to stock trading companies, having pension funds increase stock holdings and threatening short-sellers with legal action. Short-sellers make a profit by trading stocks that are decreasing in prices.
The state China Securities Finance Corporation on Tuesday said it will continue to buy stocks to "stabilize" the market. The People's Bank of China also said it would place over $8 billion into money markets funds, which are considered safe debt investments.
Companies have also cancelled plans to sell new shares on exchanges and, at one point, more than 1,400 companies requested that trading in their shares be halted.
Will it affect China’s economy and the world?
However, China’s stock market is not closely connected to its economy. The Associated Press recently reported on a study by the Southwestern University of Finance in Chengdu, China. It said only 8.8 percent of households in China are involved in the market. That is much lower than the 30 percent of households in the U.S. with investment in the market.
Many of the companies listed on Chinese markets are state-owned companies. Investors react to changes in government regulations and to availability of financing for trading. This can mean that share prices do not follow the economic performance of the companies that issue them.
In the twelve months before June, China’s stock market measures gained about 150 percent. At the same time, China reported lower economic growth during the same period.
China’s share price drop has had a limited effect on stock exchanges around the world. Stock indexes in Europe and Asia have had decreases in July. But, China limits the number of stocks that foreign investors can buy through a link called the Shanghai-Hong Kong Stock Connection. In the case of China, that means money from foreign investors cannot easily flow in or out.
Some experts say recent losses could be a sign that Chinese investors are worried that the government plans to reduce its support for the market.
I’m Mario Ritter.
Mario Ritter wrote this report with additional material from VOA’s William Gallo, Reuters and AP. Hai Do was the editor.
Words in This Story
pension –n. a plan that provides pay to retirees from a company or government which invests money taken from employers and employees
stabilize –v. to become less affected by change or movement; to become more stable
households –n. people of one family who are living together
issue –v. to release, give out or sell (example: company officials issued the stock)