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By Jeremy Glaser and Daniel Rohr, CFA | 01-07-2016 03:00 PM

What's Fueling the Volatility in China?

Fundamental, technical, and behavioral factors are all at play in sending Chinese and global shares lower, says Morningstar’s Dan Rohr.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Despite trading for less than 30 minutes on Thursday, the Chinese stock market has roiled global markets again. I'm here with Dan Rohr--he's an analyst here at Morningstar--for his take on what's happening in China and what impact it will have on the U.S. Dan, thank you for joining me.

Dan Rohr: My pleasure.

Glaser: Let's start with why China, really, since the beginning of the year has been under such intense pressure. Have we really seen any new data that changes the story at all? 

Rohr: I think what we've seen out of the Chinese equity market is really a combination of multiple factors: fundamental, technical, and then behavioral, too. Fundamental, in the sense that the recent data hasn't been all that great. For example, you had the services PMI just hit a 17-month low. This really punches a hole in the bullish narrative that China could somehow rebalance from an investment in a manufacturing-oriented economy to one more oriented to consumption and services. And then you also had the big drop in China's foreign reserves for the declines in the RMB. So, there were fundamental factors at play with the declines we've seen in the Chinese equity market.

You have the technical factor exacerbating those fundamental declines in the sense that these circuit breakers that the government has employed in the equity market--basically, pausing trading for 15 minutes when you have a 5% decline and then halting trading altogether for the remainder of the day with a 7% decline--causing this phenomenon of rushing for the exits. So, once that 5% threshold kicks in, you have everyone trying to sell, trying to get ahead of the 7% threshold. It ends up being a bit of a self-fulfilling prophecy.

Finally, you have the behavioral factor. This has to do with the fact that the Chinese stock market is fairly undeveloped relative to most developed-economy stock markets in the sense that it tends to be somewhat divorced from economic fundamentals and trades more on people's expectations of where stock prices are headed, as opposed to where business fundamentals are headed. Remember this is a stock market that had an enormous bull run from summer 2014 to summer 2015, despite month after month after month of deteriorating economic fundamentals. So, just a small change in investment sentiment regarding where prices are headed can beget very large swings in share-price movement. So, I think that's in play, too.

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