China’s market turmoil: Worry, but don’t panic
China's tumbling stock prices are, in themselves, nothing for investors outside the country to panic over. But some of the reasons for the slide are plenty troubling.
Shares on China's main stock market fell so fast Thursday that for the second time in four days, circuit-breaker mechanisms kicked in and halted trading, in this case after just 30 minutes. The sell-off sent stocks into a skid across Asia, Europe and U.S., where the Dow Jones average was down more than 350 points by midafternoon.
This kind of volatility in China has been common in recent months, and because of government regulations, few foreigners even own stocks on the Chinese markets that seized up.
The selling this time, though, was prompted in part by worries about a slowdown in China's manufacturing and service sectors. And because China is the second-largest economy in the world, those problems could spell trouble around the globe.
"This is not a situation that should result in panic; it should result in caution," said Kristina Hooper, head of investment strategies for the U.S. at Allianz Global Investors.
A slowdown in China is seen as a threat by many investors because the country has been the main engine of global economic growth for years, particularly during the depths of the Great Recession.
U.S. and European companies have rushed to sell cars and a multitude of other products to China's fast-growing middle class. And the country's huge manufacturing sector is a major buyer of machinery and basic materials such as copper and oil, often from countries such as Brazil and Russia.
Even though China's economy is still growing at a rate that would be the envy of advanced economies, it's only about two-thirds of what it was five years ago and is expected to slow further. That could drag down profits at corporations all over the world.
So while U.S. investors may not have their money in Chinese mainland stocks, they have exposure through the companies that are looking to sell things to China. For example, China accounted for more than half of Apple's revenue growth in the fiscal year that ended in September.
Another problem: Investors don't trust official economic figures from the Chinese government. China says its economy is growing at close to 7 percent, but many investors think that is inflated. After all, the country's official unemployment rate has been basically unchanged for years.
Many investors look instead at how much electricity is being produced and other statistics they consider more reliable. Mutual fund managers say China's actual economic growth could be closer to 4 percent.
"Chinese growth is clearly slowing, but it is not plummeting," said Ben Mandel, a strategist with JPMorgan Funds.
The slowdown has already hit corporate profits. American heavy-equipment maker Caterpillar is seeing sales weakening not only in China but also in Brazil and other countries that dig out the commodities China used to be so hungry for.
Still, Japan and Europe do a lot more business in China than the U.S. does, and as a result, they face higher risks.
"It will not translate into a mortal threat to U.S. economic growth," Mandel said. "When we talk developed markets, Japan is the most heavily exposed to China, with Europe being in the middle, and last is the U.S."
That's one reason European and Japanese stock indexes have fallen even more than U.S. markets this week. China is a key market for German's BMW and Mercedes Benz, for example, and Germany's DAX index is down 7.1 percent this week. Japan's Nikkei 225 index is down 6.7 percent.
After the market closed Thursday, Chinese regulators removed the recently installed circuit breakers, hoping that will allow markets to find their level.
But that may mean even more volatility in a year that has already had a lot.
"We're only seven days into 2016 and we've already had North Korea's nuclear test, Saudi Arabia and Iran cutting diplomatic relations and China devalue their currency," Hooper said. "It's going to be a volatile, turbulent year, and investors need to be prepared for that."
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