Wall Street and other major financial centers continued to fall after Chinese stocks suffered their worst one-day sell-off in a decade. China's Shanghai Composite dropped almost 9 per cent, according to the Courier Mail. For Wall Street, it was the worst day since the September 11 attacks. Investors are worried that China's booming economy has hit a rough patch. "There’s the fear of the Asian contagion. Chinese stocks – which had been going strong – faced their worst slump in a decade. Some U.S. stocks, including Coach Inc., Tiffany & Co. and Alcoa, tumbled on fears of troubles in China." Here's the situation so far:
Mining and energy shares led the market rout, with economically sensitive sectors such as construction and building materials also hit amid renewed concern about slower economic growth in the United States and China. The FTSEurofirst 300 index of leading European shares closed 2.86 per cent lower at 1,506.05 points, its lowest level since January 11 and erasing nearly two thirds of its gains since the start of the year.
Sentiment was also hurt by an 8.8-per cent slide in China's benchmark Shanghai Composite Index -- its biggest daily percentage fall since 1997 -- amid fears that authorities would crack down on the speculation that drove shares to record highs. Traders said the slide did not appear to be triggered by concrete news, but the tumble came a day after the main index jumped to an all-time high, bringing its gains for this year to 14 per cent. The market soared 130 per cent last year, making it the world's best-performing major market.
Resurging worries that slower growth in the red-hot Chinese economy could cap demand for basic materials such as oil and metals prompted investors to lock in their profits on energy and mining stocks. Heightened risk aversion sparked by mounting geopolitical tension surrounding Iran's nuclear program also hit equities.
Well functioning markets reflect the available information, and the Shanghai Composite Index mirror its expectations of China's coming economic performance. China is not expected to do well; and so the Index fell. The sell-offs rippling through capital markets across the globe are reminders of how important interrelated developments are in a globalized world. Terrorist groups in Waziristan, the nuclear weapons research of Ayatollahs in Iran and the management of the Chinese economy affect everyone. World capital markets are able to spread risk and revalue assets quite efficiently. But the ponderous political system, which seems capable only of going in circles does a far worse job of managing the the flow of political and military action across boundaries. Perhaps we have already developed the mechanisms for coping, in a rudimentary way at least, with the economic side of a globalized world. But as the puerile debate over Iraq in the the political arena shows, there may be a way to go before the policy side catches up.
One of the most difficult aspects of acting in today's global environment is that there is no easy way of spreading around the risk and 'smoothing out' the consequences of political action. Paul Kenger at Townhall relates the story of how Ronald Reagan conspired with the Saudis to manipulate oil prices -- and he omitted the mention of bleeding the Red Army in Afghanistan -- to win the Cold War. Seymour Hersh has a long article in the New Yorker where he claims that America is now playing the Sunnis against the Shi'ites -- and vice versa -- to win the war on terror. But Hersh can't make up his mind over who to root for, which doesn't seem to bother him much for so long as he can boo George Bush. But Hersh is probably right in saying that, in a world where we must often support one enemy to fight another, the distinction between the Good Guys and the Bad Guys can change in a heartbeat. Anyone remember Yalta? It took a long time to sell-off that stock.