2016 global markets: Off to a rocky start

Earlier on Monday, trading on China's Shanghai and Shenzhen stock exchanges was stopped due to restrictions set under the new circuit breaker rules.

The unprecedented act drove global markets into a state of panic, with American, European and Asian shares plummeting unexpectedly.

Credit: Reuters

Credit: Reuters

BBC News sources indicate that the fall in Chinese markets is mainly attributed to a survey published this month, indicating that China’s manufacturing sector has once again contracted.

That, in addition to the imminent end of the six-month lockup period on share sales by major institutional investors, drove Chinese shareholders to dump their stocks and led to the fall in prices.

However, financial analysts cannot attribute the whole state of frenzy to Chinese stock markets. Part of the frenzy is related to the Saudi-Iranian tensions this week. Following the execution of Shia cleric Sheikh Nimr al-Nimr in Saudi Arabia, protests rose in Shiite-dominated Iran. Protesters in Iran’s capital, Tehran, set part of the Saudi Arabian embassy on fire.

This act caused the Saudi government to end diplomatic ties with Iran. Several countries followed Saudi’s decision, including Bahrain and Sudan. These set of actions sent the price of gold through the roof, as would any political dispute. Prices of Brent crude oil experienced a temporary increase, with a jump of 3 percent on Jan. 4, but fell back sharply after United States' stock markets opened.

Now, after the Chinese government decided to stop its “circuit breaker” technique, Chinese shares seem to have gone up. Markets in the U.S. and Europe have finished lower, despite China’s overall increase in the number of jobs in the United States.

According to Andrew Walker, an economics correspondent at BBC World Service, the impact of Chinese stocks on global markets should be somewhat moderate, seeing that foreigners own a mere 2 percent of the shares in China.

With China being the second largest economy in the world, Walker worries about what the stocks might be predicting with regards to the health of the Chinese economy during 2016.

Could it be heading toward a huge crash, or is it just a minor complication in an otherwise well-structured government plan?