China's stock market crash...in 2 minutes

Why China's market meltdown affects the rest of the world

China's stock markets are suffering from massive volatility and investors are running scared. If you're just catching up to it, here's what you need to know. Last updated: August 27, 3:30 am ET (7:30 am GMT).

1) China markets stabilized on Thursday as investors in Asia joined a global stocks rally. The benchmark Shanghai Composite closed up 5.3%, while the smaller Shenzhen Composite added 3.3%.

2) The performance comes after a series of wild trading sessions. Before rebounding on Thursday, the Shanghai Composite had lost more than 20% over the previous five days.

3) The sharp declines were terrible news for officials in Beijing, who had been trying desperately to support stocks.

4) The root cause of all the turmoil: Over the past year, investors poured more and more into Chinese stocks, even though economic growth and company profits were weak.

5) Retail investors -- think mom and pop, average folks -- were the most enthusiastic. A classic bubble developed.

6) The bubble popped on June 12, and the Shanghai index lost about a third of its value before rebounding. Losses were even more dramatic on the smaller Shenzhen Composite.

7) China moved aggressively to control the crisis. The government gave money to brokerages to buy stocks -- and ordered company executives not to sell their shares. New company listings were suspended. The central bank cut interest rates to a record low.

8) Regulators and security officials launched an investigation into illegal short selling -- borrowing stocks so you can trade them in the hope they fall -- and rumor mongering. Only approved brokers are allowed to engage in short selling in China.

9) For a while, Beijing's plan appeared to work, but the Shanghai Composite has resumed its decline. The index has dropped more than 40% from its June 12 peak, erasing all gains year to date.

10) Foreigners own just 1.5% of Chinese shares, so your portfolio is unlikely to be directly affected. Still, economists are worried that stock losses will ripple through China's economy, and take a bite out of consumer spending. Gold, copper and other commodity prices have been affected.

11) The government's goal is to minimize damage to the real economy, and Beijing still has policy tools it can use to support growth. The central bank has cut interest rates and lowered the amount banks are required to keep on reserve, making it cheaper to take out loans and easier for banks to lend. Other options include boosting infrastructure spending and slashing taxes.

12) However, there are signs of weakness spreading through China's manufacturing sector. On Friday, a key gauge of China's manufacturing activity tumbled to its lowest level in 77 months.

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