Yesterday’s headlines were undoubtedly dominated by news coming from China, after the stock market in Shanghai collapsed by 8.5% during Monday’s trade. The knock-on effect from the crash in China rippled across the globe, sending most western markets into freefall in what quickly became known as ‘‘Black Monday’’.

More than €100bn alone was wiped off the value of the FTSE 100 in London and the Dow on Wall Street during yesterday’s rout. But what’s happening in China and why is it having such an impact on western markets?

Over the last 13 months, the value of Chinese stock markets has soared by more than 150% as retail investors, often heavily borrowed, pile into the rising market – effectively creating a bubble. Since June this year, the bubble had shown signs that it was about to burst after recording a series of sharp falls due to warnings that Chinese stocks were significantly overvalued.

ADVERTISEMENT

Officials in Beijing then stepped in to try to shore up the market and restore confidence in the country’s economic health.

Shockwaves

However, China sent shockwaves through the global markets in early August after the central bank of China made the surprise decision to devalue the yuan, China’s currency, by almost 4% in a 24-hour period.

The currency devaluation, coupled with fresh data that showed lower than predicted economic growth and a decline in Chinese exports, sparked renewed concerns about the health of the Chinese economy.

Markets were then plunged into turmoil at the end of last week (Friday), after a private survey showed that China’s manufacturing sector shrunk at its fastest pace in over six years for the month of August, as a result of declining domestic and export demand.

China, the world’s largest importer of metals, grain commodities and energy, has been the engine room for global demand growth over the past decade. The signs of a slowdown in the Chinese economy plagued markets at the prospect of global supply gluts for oil and other commodities.

When markets opened yesterday (Monday), commodities fell to their lowest level this century as panicked and nervous investors sold off risky assets in anticipation of waning demand.

Futures prices for grain commodities on both the Paris (MATIF) and Chicago (CBOT) exchanges took a hammering during Monday’s trade, while Brent crude oil sunk by up to $3/barrel to finish at its lowest level since March 2009.

The rout of China’s stock markets continued into today (Tuesday) after both indices in Shanghai and Shenzhen sank by a further 7.6% and 7.1%, respectively. However, stock markets in Europe and the US appear to be rallying during early trade on Tuesday as a calmer mood from investors helps to support commodities once again.

Grain futures in Paris were recovering some of yesterday’s losses during early trading while in Chicago, overnight prices for maize and wheat are also showing upward momentum.