China’s Biggest Stock Market Loss Since the 2007 Crash
As you’ll note here, China has a lot of experience dealing with market crashes. Some of the setbacks they’ve endured were astonishingly bad. The communist party found a way, but in those cases, it was exports that saved them. This time, export revenue won’t be available while the country’s finances are in bad shape.
Currently, China is experiencing price deflation reflecting weak domestic demand and stalling economic growth. Prices fell in 2023 and 2024, the longest duration of deflation since the 1960s. And the gross domestic product deflator – the broadest measure of price changes in an economy – dipped to -0.8% in the last three months of 2024. This could be a “deflationary spiral” of layoffs and reduced spending that result in even less consumption and then onto a recession or depression.
This bad news might be result in real panic, putting China’s supreme leader xi jinping’s back against the wall. Undaunted, he announced last week that China would escalate its trade war with the US by imposing another 34% tariff hike on the US.
The result today: President Trump responded with a 50% hike on Beijing. Trump warned of what what his response would be yet it didn’t seem to hit home with the communist leader. Today, Chinese stocks took a deep plunge and on Wednesday when the US reciprocal tariffs are implemented, the slide might be severe.
China’s economy is 70% funded by Chinese consumers who face layoffs and a housing market that may soon collapse.
The Hong Kong Hang Seng Index dropped 12.8%, after a 2144 drop earlier, and is now down to 19,910. Alibaba and Tencent both fell more than 8% in trading. Chipmaker TSMC fell 10% on the news. China’s CSI300 blue-chip index fell over 7%, with its biggest losses in sectors such as solar companies and household appliances. China’s currency, the yuan, slipped to its lowest level since January, now changing hands at 7.31 per USD. This might be worsened further if Xiping decides to devalue it for economic advantage, or bail China out.
Implications of the Collapse of the Chinese Stock Market
As the Chinese economy shrinks and falls into a deep recession, it may set off an additional set of problems for international trade. China is reputed for its dumping of product onto its export trading partners, and almost all nations are on the alert. It’s known for not meeting trade agreements. It faces lost export markets worldwide as protectionism sweeps the globe.
Given most countries have no remorse or sympathy for the US trade deficit and debt situation, these trades could be worsened by resentment on all sides.
China’s GDP Previous Forecast
The new forecast of GDP going forward will reflect disappearing export markets.
China is a large country with many economic and industrial strengths, but the loss of international exports leaves the country’s controlling communist party at risk. In the face of economic collapse, the communist leaders are likely to respond according to their traditional playbook – protecting their sales and exports without regard for the harm that might be causing.
With the US going fully xChina, it’s economy will see much further decline. Not all of this has been experienced or fully priced in as yet, and with the price collapse today, all hope of keeping their massive trade surplus is disappearing. Now, even break even bilaterial trade is gone. President Trump warned after Beijing’s 34% hike announcement that China is not playing its cards well.
The downside for China stock markets and its economy is concerning, and it needs to regroup and revise to deal with a central-managed pyramid that has no advantage over free market markets, sectors and private companies. It has no way to win battles or participate in protected markets. Its unfair advantage has been nullified. The WTO cannot save them.
What is the Impact of the Tariff War on China?
In general, the Impact of a tariff war on the Chinese stock market is:
Capital Flight & Investor Panic:
- A sharp sell-off could trigger foreign investor withdrawals from Chinese equities and bonds, worsening liquidity.
- Retail investor losses could dampen consumer confidence (~70% of China’s GDP relies on domestic consumption).
Currency Depreciation (Weaker Yuan):
- The PBOC may weaken the yuan (CNY) to offset tariff pain, risking capital outflows and inflation.
- A weaker yuan could trigger competitive devaluations in Asia (e.g., Japan, South Korea).
Corporate Debt Crisis:
- Many Chinese firms (especially property developers like Evergrande) are highly leveraged—stock crashes could trigger bond defaults and banking stress.
Global Spillover Effects
U.S. & S&P 500 Impact
Supply Chain Disruptions:
- U.S. companies (Apple, Tesla, Nike) reliant on Chinese manufacturing face higher costs, squeezing margins.
Tech & semiconductor stocks (Nvidia, Intel) could fall due to China demand fears.
Inflation Risks:
- Tariffs → higher import prices → renewed U.S. inflation → Fed may delay rate cuts.
Market Volatility (VIX Spike):
- S&P 500 could drop 2-5% short-term on contagion fears (as seen in 2018-19 trade war).
Emerging Markets (EM) & Europe
Commodity Demand Drop:
- China is the top consumer of oil, copper, iron ore—weaker demand hurts Brazil, Australia, Chile.
German & EU Exporters at Risk:
- Germany’s DAX (Siemens, BMW) relies on China for ~10% of exports.
Geopolitical Fallout
China’s Retaliation:
- New tariffs on U.S. agriculture (soybeans), Boeing, or tech bans (like Huawei 2.0).
Dumping of U.S. Treasuries (China holds $770B)—could spike U.S. bond yields.
Taiwan Risk:
- China may escalate military pressure on Taiwan if economic tools fail.
Long-Term Structural Shifts
Accelerated Decoupling:
- U.S. and EU firms may accelerate “China+1” supply chain shifts to Vietnam, India, Mexico.
- China could double down on domestic tech (SMIC, Huawei) to reduce U.S. reliance.
Capital Market Isolation:
- Foreign investors may permanently underweight China (MSCI EM ex-China ETFs gain traction).
- Hong Kong’s status as a financial hub erodes further.
Policy Responses to Watch
China’s Likely Moves:
Stock Market Bailouts:
- State-backed “National Team” buying (as in 2015, 2022).
- Suspensions of short-selling or trading halts.
Fiscal Stimulus:
- More infrastructure spending, consumer subsidies (e.g., EVs, electronics).
Monetary Easing:
- PBOC cuts rates/RRR, but limited room (yuan pressure).
U.S. & Global Reactions:
Fed Dilemma:
- If China’s crash causes global deflation → Fed cuts rates sooner.
- If tariffs spike U.S. inflation → Fed stays hawkish.
EU/Japan Stimulus:
- ECB/BOJ may ease policy to offset China slowdown.
China is Experienced with Stock Market and Economic Crashes
Their experience actually works in their favor in managing this one, but is overconfidence a huge threat? What has changed this time is the specter of a catastrophic loss of their export market, including total exclusion from the lucrative US market it’s been so dependent on.
Review of a few of the more recent crash experiences:
- 1993–1994: The First Bubble Burst
- Shanghai Composite peaked at 1,558 in February 1993, then crashed -79% to 325 by July 1994.
- Cause:
- Early-stage market speculation after China’s stock exchanges (Shanghai & Shenzhen) were established (1990).
- Government tightened credit to cool inflation, triggering a sell-off.
- 2001–2005: Post-WTO Entry Slump
- Shanghai Composite fell -55% from 2,245 (June 2001) to 998 (June 2005).
- Causes:
- State-owned enterprise (SOE) reforms led to massive share sell-offs.
- SARS outbreak (2003) hurt economic confidence.
- Regulatory crackdowns on market manipulation.
- 2007–2008: The Global Financial Crisis Crash
- Shanghai Composite plunged -72% from 6,124 (Oct 2007) to 1,664 (Oct 2008).
- Causes:
- Speculative bubble (PE ratios hit 70x+).
- Lehman Brothers collapse triggered global panic.
- China’s own economic slowdown post-2008 Olympics.
- 2015–2016: The “Great Crash” & Government Bailout
- Shanghai Composite dropped -45% from 5,166 (June 2015) to 2,850 (Feb 2016).
- Shenzhen Composite fell -47%.
- Causes:
- Margin trading bubble (investors borrowed heavily to buy stocks).
- Sudden regulatory crackdown on leverage.
- Circuit breakers failed, worsening panic.
- Government Response:
- $1 trillion+ bailout (“National Team” buying).
- Short-selling bans, trading suspensions.
- 2018–2019: U.S.-China Trade War Meltdown
- Shanghai Composite fell -32% from 3,587 (Jan 2018) to 2,440 (Jan 2019).
- Hang Seng (Hong Kong) dropped -25%.
- Causes:
- Trump’s tariffs ($250B+ on Chinese goods).
- Tech war (Huawei ban, SMIC sanctions).
- Chinese economic slowdown (debt crisis fears).
- 2021–2024: Evergrande Crisis & Regulatory Crackdown
- Hang Seng crashed -50%+ from 2021 peak (~31,000) to 2024 low (~14,500).
- Shanghai Composite underperformed (flat vs. S&P 500 rally).
- Causes:
- Evergrande/real estate collapse ($300B+ defaults).
- Xi’s regulatory crackdowns (tech, tutoring, gaming).
- Zero-COVID policy disruptions (2022).
- U.S. delisting threats (Alibaba, JD.com ADRs).
The Road Ahead for China’s Economy
If this 2025 tariff trade war continues and China doesn’t back down from their additional tariffs and all trade sanctions, we might be looking at the worst-case scenario. Most predictions about this conflict are put forward with the idea that China can circumnavigate the US with other countries. Yet they’re all in crisis too. Can communism thrive on its own with a new Wall of China erected? The Chinese people have changed and they’ll be strongly considered ousting the communist party from power. Any internal struggle would have concerns for the globe as the communists try to hang onto to power.
Bottom Line: Worst-Case vs. Base Case
| Scenario | Implications |
| Full-Blown Crisis (2008-style) | Global recession, S&P 500 drops 30%, commodity crash, deep Chinese depression. |
| Controlled Slowdown (PBOC stabilizes) | Short-term volatility, but limited contagion (like 2015-16). |
| Escalation to Cold War 2.0 | Long-term bifurcation of tech (U.S. vs. China chips), stagflation, collapse of the Chinese economy. |
President Trump’s statements and speeches make it abundantly clear that the US is in bad shape financially with massive trade deficits, huge debt interest payments, and low tax revenues to manage.
Although he doesn’t articulate these issues clearly enough, the US faces its own economic crises, thus any forecast of the US stock market might be much too optimistic.
Investors need to be ultra-wary of investing in China. Both Europe and the USA are headed for tough times as the debt-era challenges are dealt with.
See more on China and the repatriation of industry and jobs back to America.
