China's 2015 Stock Market Crisis: Causes and Global Impact

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By 2015, many global economies had returned to modest stability and growth since the turbulence wrought by the 2007-2008 financial crisis. However, while many countries expected a fruitful economic climate, the GDP growth rate in China, the second-biggest economy in the world, fell to 7% in 2015. This was its lowest level since 1990. Against this backdrop, China faced a stock market crash until 2016.

Pundits began to examine how the country’s economic volatility might impact the U.S. and other global economies. China’s vast holdings of U.S. Treasury debt raised stability concerns, and China’s dependency and trade relationship with the U.S. is a significant factor in global economic dynamics. Speculation arose over whether China’s troubles might spark a new global downturn and trouble for the U.S. related to its foreign trade, financial markets, and economic growth.

China’s Economic Growth: 1985 to 2015

From 1985 to 2015, China’s GDP growth rate averaged almost 10% per year, with annual peaks of 13% and higher. Much of China’s rapid growth was tied to its 1970s economic reform. In 1978, after years of state control of all productive assets, China started introducing market principles to stimulate its economy.

Over the following three decades, China encouraged the formation of rural enterprises and private businesses, liberalized foreign trade and investment, and invested heavily in production. Although capital assets and accumulation heavily influenced the nation’s growth, China also sustained high productivity and worker efficiency, which continued to drive its economic success.

Signs of China’s Economic Slowdown

However, it seemed that even China’s rapid growth couldn’t last forever. From 2010 to 2015, its GDP growth rate slowed to 7%.

Still, to put this in perspective, the U.S. economy grew 2.7% in 2015, while global GDP growth was 3.1%. Even having a slower rate of growth than prior years, China still outpaced a majority of countries, including many advanced economies.

Nevertheless, some market analysts felt that China was showing signs of a possible economic collapse:

• In August 2015, the Nikkei 225 (N225) index declined almost 12%, with a near 9% dive posted on a single day.
• Oil prices, which had been declining for months, reached a six-year low in August 2015 (which impacted the stock exchange). Chinese oil demand dropped, which kept global oil prices low.
• Stock market losses triggered global sell-offs and prompted China to devaluate the yuan.
• Chinese manufacturing declined to its lowest level in three years, with the nation’s purchasing manager’s index falling to 49.7 in August 2015, implying a contraction.

This chain of events caused alarm for some global economists. Worries about a continued freefall in China raised concerns about whether a spillover effect could hit the U.S. 

Economic Ties Between the U.S. and China

While the U.S. and China haven’t always seen eye to eye on diplomatic issues, particularly human rights and cybersecurity, the two counties have built a strong economic relationship, with significant trade, foreign direct investment, and debt financing.

In 2014 China was the third-largest export market for U.S. goods, after Canada and Mexico, accounting for over $123 billion in U.S. exports. The United States was China’s largest export market in this same time, importing more than $468 billion in Chinese goods that year before the crisis.

China was also a popular destination for U.S. foreign direct investments. The stock of foreign investment (primarily in the manufacturing sector) from the U.S. into China exceeded $92.15 billion in 2015.

That being said, the U.S. had a significant trade deficit with China due to China’s holdings of U.S. Treasury bonds. In the spring of 2015, right before the crisis, China held U.S. debt amounting to $1.22 trillion.

For China, Treasuries were a safe and stable way to maintain an export-led economy and creditworthiness in the global economy. As long as China continued to hold a massive amount of forex reserves and U.S. debt, some market observers felt that the U.S. economy could be at the mercy of China.

Potential Risks and Scenarios

Given that China’s economic turmoil at the time was followed by a downturn in U.S. and global stock markets, a pessimistic reader might have wondered if much more chaos could be expected with any continued deterioration of China’s economy.

While China held a great deal of Treasury debt, one worst-case scenario could have been the fearsome implications for the U.S. dollar had China dumped their Treasury holdings.

However, there was little actual evidence to support such a catastrophe. After all, by 2015 China was no longer the largest holder of U.S. debt, and had already been selling Treasuries in a bid to prevent the yuan from weakening beyond the level prescribed by the Chinese government.

In fact, no negative pressure was exerted on the U.S. economy. Even had China wanted to sell all of its U.S. debt, it would have been extremely difficult to find any alternative asset as stable or as liquid as U. S. Treasuries.

The Bottom Line

China’s economic activity in 2015 pointed to a country that was experiencing slower growth. The world’s second-biggest economy would have to contend with the same pressures that other advanced economies have long dealt with.

With its continued transition as a market economy after 2015, China would be more exposed to the ups and downs of the normal business cycle. And though the world was becoming more financially interconnected, at that time turmoil in one of the world’s biggest economies failed to pose any significant threat to the U.S. economy’s long-term prospects.