Today, Asian stocks fell the most in eight months, extending a rout in global equities that started in China and triggered a slump in the U.S. compounded by signs the world's largest economy is slowing. The Dow Jones Industrial Average tumbled 3.3 percent on 27 Feb, the steepest in almost four years. The measure erased its 2007 gains.  

Couple of key reasons which lead to China's sell off of over 8.8% yesterday are:

1. Rumors that Beijing may levy a  20% capital gains tax on stock investments in bid to prevent market from overheating;

2. The People's Congress and People's Consultative Conference is to start this weekend. Investors are worried that the Chinese government may impose tightening measures to reduce liquidity in bid to cool the stock markets. 

What can we expect?

In the short term, markets will experience further volatility. Markets which have risen strongly over recent months may see further correction before stabilizing.

In the long term, this correction is definitely healthy for China and Asia's growth. This has been a long overdue correction which the market has been anticipating since late 2006. Any policies implemented by the Chinese government should be seen as healthy for the long term growth, needed to cool the economy before suffering any hard landing. While we may see increasing volatility going forward, we still believe that China remains a great long-term story and there are a number of very interesting bottom-up opportunities.

Point to note
One positive takeaway from this event is just how big and important China is now, in respect to the world. See how the US and Europe markets react when the China market drops. This again confirms the significant role and impact of China's future development is to the rest of the world. - First State Investments