Understanding China's stock crisis
'What happens there, matters here,' says director of the China Institute
There is pandemonium on Chinese trading floors as the country's stock market continues to plummet.
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Last year, Chinese stocks saw huge gains and surged nearly 150 per cent. But since June, the market has dropped more than 30 per cent and it's still falling.
How did this happen?
More than 40 million new players, mostly small retail investors, dove into the Chinese market since April, according to the director of the University of Alberta's China Institute.
Gordon Houlden describes the new kids on the block as an unsophisticated bunch, convinced that in the face of a year of steady growth they could "only win money" by investing in Chinese stocks.
As a result, prices went up and a wave of companies went public with IPOs.
"Some of the more seasoned people, I think, began to realize the increases had far outrun the economic fundamentals underneath them," said Houlden.
"Then the collapse started and the rush towards the exit."
When China sneezes, the world gets a cold
"It has the potential to hurt tens of millions of people," said Houlden, who also served in Beijing as the minister of the embassy of Canada to China from 2001 to 2004.
He says when China's stock market started to plunge, the world felt it immediately.
Energy and other commodity prices took a hit, said Houlden.
"Part of that was Greece, but a good chunk of that was China. Greece is relatively a minnow, China is a whale."
Houlden says he's already hearing concerns from Ontario's mining industry, which supplies China with base metals, such as copper and nickel.
"What happens there, matters here."
Is this China's 1929?
While some media outlets have compared the recent events in China to the stock market crash of the Great Depression, Houlden doesn't agree.
"It's different," he said. "The stock market in China is still a relatively small piece of the puzzle, compared to in the west. The whole economy has not been shaken yet."
He says in 1929, the U.S. government was not in the position to restore confidence in investors.
"China's got a lot of fire power, in terms of their savings and the number of tools they can bring to play."
Including a level of state control over the Shanghai and Shenzhen exchanges, which the Chinese government has already used in an attempt to stabilize the country's sinking stock markets.
"You can see that when there is a challenge, they default back to the control module."