After 'Black Monday,' why Americans shouldn't worry, but Chinese should (Updated)

The World
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Investors look an electronic board showing stock information at a brokerage house in Shanghai, China, August 24, 2015. Chinese stocks dived more than 8 percent on Monday morning, with the Shanghai index giving up all its gains for the year.

The Chinese press has taken to calling the latest sell-off “Black Monday.” Some American news outlets were calling the day after "Turnaround Tuesday." Until they weren't. Now it's "Too-bad Tuesday." 

Minutes after the opening bell, the Dow Jones Industrial Average shot up by 350 points, or 2.25 percent. It peaked up 441 points. But with minutes to go before the end of the trading day, the Dow plunged and closed down 204 points. In one bright spot, markets throughout Europe strongly rebounded on Tuesday after steep losses on Monday.

In China, Tuesday was another bloodbath on the markets. China's benchmark Shanghai Composite Index continued its slide, falling 7.6 percent. The Index fell 8.5 percent on Monday, closing a staggering 40 percent below its peak in June. 

On Monday, World markets followed China’s lead, with indexes throughout Asia and Europe closing sharply lower. In the US, indexes posted the steepest losses in four years. The Dow Jones Industrial Average opened the trading day 1,089 points lower, the biggest intra-day drop in history. It then rebounded to claw back much of its losses, then fell again and finally closed down 588 points, or 3.6 percent. It was a huge point loss, but didn't make history by percentage — the Dow would need to drop 7.85 percent to crack the top 10 for all-time largest one-day losses

The worldwide sell-off began in earnest two weeks back when China devalued its currency. Since then, it’s been a steady list of bad economic news from the world’s second-largest economy. 

American investors are exposed to Chinese stocks, as well as other international markets, through mutual funds and index funds. Still, Bill Stone, chief investment strategist with the PNC Financial Services Group in Philadelphia, says investors shouldn’t hit the panic button. He says most of us probably aren’t exposed to Chinese companies too much.

“There’s a difference between Chinese stocks in Hong Kong and mainland China. A lot of the really big moves have come from the mainland China stocks, which are not really in the indexes that most people follow,” says Stone.

It's a different story over in China. One of the biggest groups to be affected there is the small-time investor, pensioners who have put their savings into the stock market only to see their retirement go up in smoke.

The Guardian's Fergus Ryan spent the day at a trading house in Beijing talking with some pensioners who have found themselves in this dire situation.

“Most of the 70 or so gray-haired retirees who had gathered in the hall were a little shell shocked,” says Ryan.

One 82-year-old man whom he interviewed declined to give his name but expressed anger at the Communist Party.

“He said, ‘I depend on the Communist party to put food on my table.’ And he held his hands up in a handcuffed gesture suggesting that he wasn’t free to talk. But nonetheless he did talk to me and he said, ‘The Communist party is awful. All my money is gone.”

The pensioner went on to tell Ryan that things were much better under Chairman Mao.  Ryan received similar sentiments from several other retirees he spoke with.

It was the government they told Ryan that advised them to invest in the market.  As recently as April, the newspaper People’s Daily, the mouthpiece of the Communist Party was encouraging pensioners to invest in what they said would be a bull run.

Back in the US, what about the real economy, meaning jobs? After all, China’s growth helps fuel the world’s economy.

Bill Stone isn’t alarmed on that front either.

“It’s worth keeping in mind, it’s not a matter of the Chinese economy going into contraction right now,” says Stone. “It’s more slowing from a stronger pace. So there’s probably less to worry about it causing the US to fall into recession.”

Stone’s bank is forecasting the US to grow about 3 percent in the second half of the year.  

“You do need to keep an eye on it (China’s economy),” says Stone. “But at this point, we don’t think it is something that can really drag down both the United States and the global economic expansion.” 

This story was updated to include economic news on Tuesday. 

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