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There was another China stock market crash today (Thursday) as worries about market liquidity in the nation intensified. For U.S. investors, the China stock market crash hits close to home, because every major sell-off in China will have a massive impact on global stocks in 2016.
But first, here's why the Chinese stock market crashed today...
The Shanghai Composite Index plunged 6.4% to 2,741.25 Thursday. It was the worst percentage drop for China's key benchmark since Jan. 26. The index is now down 47% since last summer's peak.
The smaller Shenzhen Composite Index ended the session down 7.3%. China's Nasdaq-style ChiNext board tumbled 7.6%. More than 1,300 stocks in Shanghai and Shenzhen fell by 10%, the maximum level that Chinese authorities allow an individual stock to fall in one day.
Here's what caused today's China stock market crash:
- Reports indicated that a People's Bank of China official hinted at an increase in the fiscal deficit to 4% of GDP from the current 3%.
- China's central bank also continued to lower its currency, setting it to the lowest level since the month began.
- China's bond market saw a surge in yield, which startled investors and sparked speculation of a brewing liquidity crunch.
- Jittery investors widely withdrew money from Chinese stock markets. After a recent rally, many investors started taking profits. The Shanghai Composite had climbed 9% in February before today's crash.
- Analysts also pointed to an announcement by China's banking regulator early Thursday afternoon that it had banned Zhongrong Life Insurance from adding stock investments due to solvency risks.
Today's China stock market crash comes at a sensitive time for the Chinese government.
Starting tomorrow, Chinese officials are hosting the world's leading central banks and finance ministers. They are expected to discuss mounting global anxieties about China's economy and financial markets.
A slowdown in China, the world's second-largest economy, has spooked investors the world. In January, China reported 2015's GDP was 6.9%. That was the lowest rate in a quarter century.
According to Money Morning experts, the China stock market crash has a direct impact on U.S. investors and their money. And that's a trend that will continue through 2016...
What a China Stock Market Crash Means for U.S. Investors
The MSCI All-Country World Index, a broad benchmark of global stocks, slipped into a bear market on Feb. 11 when it closed 20% below its April 2015 high. And the China stock market crash was a major part of that.
According to Money Morning Global Credit Strategist Michael Lewitt, there were several factors over the last two years that have created this downward pressure on the Chinese stock market...
"China is a house of cards whose debt-engorged economy hit a wall in mid-2014 after seeing its total debt grow from $7 trillion in 2007 to $28 trillion (it is now probably over $30 trillion)," he said. "This then caused global commodities markets, which were inflated by the Chinese debt explosion, to collapse."
And that's not the only problem facing U.S. investors. Corporate earnings are also falling at an alarming rate.
With 87% of the S&P 500 reporting, Q4 earnings reflect an average decline of 3.6%, according to FactSet. If that pace holds, profits for the benchmark will have fallen for three straight quarters for the first time since 2009. Companies that deal with China directly could be in for even more pain.
And the current quarter looks even worse. FactSet projects earnings will decline 6.9% in Q1 2016. That's down sharply from growth of 4.8% forecast in September and 15.1% in April 2015.
Money Morning experts have been warning of a stock market crash for months. That's why they have developed a stock market crash survival guide that will help you protect your money - and even book triple-digit profits - when the markets fall.
- CNBC: China's Economy Grew at 6.9 Percent in 2015, a 25-Year Low
- Bloomberg: European Stocks Rise as Oil Pares Declines; Treasuries Shave Gain
- Business Insider: Chinese Stocks Get Crushed Again