The Free Fall Of China's Stock Market - Explained In 90 Seconds

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Chinese stocks with their continued free fall have now erased gains for the year, as fears about the deepening effects of a slowdown in the world’s No. 2 economy rattled investors world-wide.

China’s stock market fell to its lowest level in five months with the benchmark Shanghai Composite Index losing more than 8 per cent. Shanghai's gains for the year have been erased and the index is now in negative territory in 2015. The South China Morning Post reports that the three week long fall of both Shanghai and Shenzhen since June this year has erased nearly US$5 trillion in value from the two markets.

The turmoil is now starting to spread to other Asian markets as India’s BSE Sensex fell more than a 1000 points.

At the heart of the Chinese market’s free-fall is the concern that the Chinese economy may be slowing dramatically as its giant manufacturing sector has slowed down to its lowest since the 2009 global financial crisis. Eswar Prasad, former China head for the International Monetary Fund says, “Views about China’s economic prospects appear to be shifting from serious concern to near panic.”

China’s surprise move to devalue its Yuan two weeks ago—to make its exports more competitive, added to investor fears of an economic slowdown.

Eiji Kinouchi, chief technical analyst at Daiwa Securities in Tokyo, said: “China could be forced to devalue the yuan even more should its economy falter, and the equity markets are dealing with the prospect of a weaker yuan amplifying the negative impact from a sluggish Chinese economy.”

While some economists say that China still has plenty of levers to pull to get its economy back into gear, the lack of official action over the weekend added to the market’s free-fall.