Here’s Why the Chinese Stock Market Will Remain Volatile

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The Chinese stock market went into a free fall in Monday’s trading, dipping an amazing 8.5% in one day. Some investors may view this as the ultimate value opportunity, while others may view this as an acknowledgement of the political risk that comes with investing in the region. One thing’s for sure, investors should brace themselves for continued volatility. Here’s why.

Fundamentals always lie at the center of investing performance. China is no different. Economic indicators point to a softening economy in the country. The Chinese Purchasing Manager’s Index gave the lowest reading in 15 months, according to Forbes. Moreover, the Wall Street Journal cites a 0.3% year-over-year decline in industrial profits as of last month. Numbers like this will surely contribute to a bearish sentiment in the global markets.

Here’s another big factor, the Chinese government, despite its move towards a free market system in recent times, can’t resist inner Communist urges to control its financial markets. Control tactics range from the ordinary to the downright scary. CNN Money highlights tactics such as suspending new share listings, making companies publish good news so that global investors will think of them in a positive light, government purchase of blue chip stocks and, frightfully, threatening short sellers with jail time.

All of this serves as a definite recipe for volatility. The softening economy will increase the bearish sentiment in any financial market. However, the hit and miss intervention from the Chinese government leaves global investors wondering about things such as political risk and liquidity. Financial markets function better when there is a stable means of buying and selling securities.

Investors who think they might not be able to access their securities at the point of their choosing may rush to sell them at a less than optimal point. Also, it leaves investors wondering about the truthfulness of the financial statements being issued in the country.

The fall in the Chinese stock market has spilled over into the American stock exchanges in Monday morning trading. The Dow is trading down 0.7% as of this writing.