World Markets

Why China's rule changes are hitting US markets

Are Chinese markets an 'accident waiting to happen'?

New rules for trading Chinese stocks spooked European and U.S. markets on Friday. (Tweet This)

Chinese exchanges and regulators announced Friday that they would crack down on over-the-counter margin trading and that they would allow fund managers to lend shares for short-selling.

The type of stocks that investors can short sell will also be expanded soon to 1,100, from 900 currently. All of these moves could slow Chinese equities' wild run higher in recent months.

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Investors observe stock market at a stock exchange corporation on April 17, 2015 in Jiujiang, Jiangxi province of China.
ChinaFotoPress | Getty Images

Although the Shanghai Stock Exchange Composite Index rose 2.2 percent in Friday trading, Chinese after-hours stock futures fell about 5.5 percent in a response to the new regulations.

Traders said U.S. and European markets were then in turn spooked by the move in those futures, and worries that the regulatory changes would be negative for the flow of recent money that has poured into Chinese exchanges.

"The securities regulator is encouraging short-selling to institutional investors, and they are going to stop margin trading on OTC," Ioan Smith, managing director of KCG Europe, said. "Traders had to catch up with that news after the Bloomberg terminals came back online, and that's when we saw the falls in Europe." (Terminals were briefly down earlier Friday)

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News of the Chinese changes followed comments from the China Securities Regulatory Commission indicating the agency expected future good fortunes for equities. Xiao Gang, who leads the CSRC, said investors should not think they are missing the boat if they had not yet invested in the Chinese stock market, which has surged around 70 percent since November.

"So apparently they told us that the bull market in Chinese stocks was going to last, and then they pulled the rug? I is confused," Rhino Trading Partners' Michael Block (actually) wrote in a Friday note.

He attributed a 14 point decline in S&P futures and a 4 percent decline in the iShares China Large-Cap exchange traded fund to this news. European shares also traded down in part because of the China news, Block added.

Are Chinese markets an 'accident waiting to happen'?

"I didn't realize China would have such an effect on the U.S. and Europe," he wrote. "The [Shanghai Stock Exchange Composite Index] is up over 32% this year. The [] is barely up over 2%. But c'est la vie, apparently."

Although there has not been a perfect correlation between U.S. stocks and booming Chinese equities, any worries about the future of those markets would cause some doubts stateside, according to Jim Meyer, CEO of Tower Bridge Advisors.

"The Chinese market has been a source of strength," he explained, so any decline could rattle equities traders.

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Any global weakness from the Chinese regulatory changes should be temporary, however, said Adrian Day of Adrian Day Asset Management.

Such a move was not unexpected, he said, given the fact that Chinese equities "have sort of gone crazy" with massive gains in recent months. And while the new rules may tamp down on those prices, the easily-spooked global markets should move along to the next focal point.

"By next week the rest of the world will have forgotten about it," Day said.

—Reuters and CNBC's Evelyn Cheng contributed to this report.