clock menu more-arrow no yes

Why the Chinese Stock Market Is Causing a Global Selloff and Hurting Tech Stocks

It could've been worse. In 2016, it might get worse.

Shutterstock / Zhu Difeng

Stock markets around the globe hit the red today after China reported its fifth straight month of weak manufacturing data.

That’s why almost all of the major stock indexes and all the major tech companies have dropped, including Apple (down as much as 2 percent), Google, Facebook, Microsoft and Twitter (all down more than 3 percent) and Amazon, which tumbled more than 5 percent.

What’s going on?

China’s rapid economic ascent over the last decade has been fueled by its competitive manufacturing base — which doesn’t necessarily mean cheap goods. Remember, most of Apple’s sought-after products are made in China.

But a slowdown in manufacturing has been happening for some time, and it’s not necessarily a bad thing. China has been trying to transform itself from being the world’s factory to becoming the world’s most powerful consumer market (right now, the U.S. still holds that crown).

The problem — and one of the key reasons global markets are down — is China isn’t quite spending enough to make up for its manufacturing slowdown. Also, the fact that China’s factories supply many of the world’s largest companies tells us there are fewer orders than before, which means fewer people are spending, or spending less than they used to — and not just in China.

So why isn’t China quite there yet as a consumer powerhouse? Well, it is a consumer powerhouse, but its consumer class is still on unsure footing. China needs to allow for an economy based on market forces — better managed companies, for example, should thrive over poorly managed, state-backed ones — in order for people to derive a more predictable or, at least, a more rational source of income. (China’s currency plays a large part in this as well, but that would be better saved for a later discussion.)

With that in mind, China has been liberalizing some of its financial and economic policies, and that has led to a ton of consumer spending. But this growing leisure class is still largely limited to an elite, urban core and hasn’t really proliferated to larger swaths of the population.

A big part of the underlying reason is that China is still very much an autocratic nation with a strong central government that is attempting to manage both large and small aspects of the economy, an ambition any central banker would tell you is a fool’s errand. Basically, China wants the strength of a market-based economy while not losing any of its central control, a kind of pseudo capitalism that has led to a lot more volatility.

And that has been the central characteristic of the Chinese economy over the past year.

When Chinese stocks lost more than 40 percent of their value this past summer, the government instituted some new controls, like halting trading on a stock when it falls below a certain percentage in a certain period of time, also known as circuit breakers, which are commonplace in U.S. markets but brand new in China. In fact, they only took effect today. There’s also a new provision that closes down the entire market if the CSI 300, one of China’s main stock indexes, falls 7 percent, which is what happened today. In other words, it could have been much, much worse.

This article originally appeared on Recode.net.