The Chinese stock market rout is raising global worries. Since mid-June, the Shanghai Composite Index has fallen by about a third, and the value of the renminbi has also tumbled. Today’s troubles stem from a stimulus program — initiated by the Chinese government to shield China from the 2008 financial crisis — that pumped massive amounts of liquidity into the system. Many unsophisticated small investors jumped into the stock market, encouraged by the government. But stock valuations are turning out to be too lofty to be justified by fundamentals, especially as the Chinese economy cools down and cracks began to show. Investors — many borrowing money to invest — began to pull out, and a stampede for the exits began.
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