Global investors feel little impact from China market plunge

China shares just a small portion of world stock holdings

An investor observes an electric screen at a stock exchange hall on July 28, 2015 in Hangzhou, China.
ChinaFotoPress | Getty Images
An investor observes an electric screen at a stock exchange hall on July 28, 2015 in Hangzhou, China.

Stock market crashes always make investors nervous.

But despite China's outsized role in the global economy, the recent gyrations in its stock market will have limited direct impact on global investors. That's because China's relatively young equities market makes up a small share of overall global stock holdings.

Chinese shares fell again Tuesday, as Beijing scrambled to try to contain the selloff that has touched off fears about wider financial fallout in the world's second-largest economy. After dropping more than 8 percent on Monday, Chinese regulators were reportedly buying stock to stabilize prices and the central bank pumped cash into the system to calm the turbulent financial waters.

The recent crash follows a dizzying bubble that saw the Shanghai composite index soar from just above 2,000 in July 2014 to a peak of nearly 5,200 in June 2015, before falling back to 3,500 in early July.

Despite the global jitters emanating from China's stock market moves, the value of publicly owned shares traded there represents about 7 percent of the world's total, according to the latest figures from the World Bank.

The fallout around the world also will be contained by Chinese restrictions on stock ownership by foreigners. While the Shanghai-Hong Kong Stock Connect has recently opened up access a bit, the total allocation for foreigners is just 3 percent of the market, according to a report from Bloomberg Intelligence.

To be sure, China's recent stock market volatility has badly damaged the confidence of Chinese investors. But the latest surge and plunge is not the first time they've seen the market rocked by wild moves. Like other smaller stock markets in developing countries, China's exchanges are often prone to wider, more frequent swings than larger, older stock markets in New York, London and Tokyo.

Still, the market's latest selloff poses major problems for China as it seeks to transition its economy from heavy dependence on government investment to a greater reliance on consumer-driven growth. Rising wages have created wealth for individual Chinese investors, but the latest losses have severely dampened consumers' outlook and wiped out millions in households' personal savings.

"Retail investors' confidence in the mainland market is very weak," said Steven Leung, a market analyst in Hong Kong, told Reuters.

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Retail investors only hold 22 percent of the market, but they account for the majority of trading volume, according to the Bloomberg report, which also notes that low stock dividends lead many Chinese investors to chase market moves "rather that focus on the fundamentals of profit and loss."

Institutional investors have just 11 percent of the market, with the rest—some 60 percent—held by state-owned parents and other investors that don't typically trade their holdings, according to the report.