China’s Markets

Making Sense of China’s Volatile Markets

July 2015 marked both a turning point and revelation of China’s control over its domestic economy. Dire stock market plunges were met with frenzied government control and panicked investors who were for the first time seeing the downward trends in a natural market cycle. Though many analysts were calling the precarious 30 percent value drop in early July a much needed market correction, the recent 8 percent drop has added further worry. Both of these market slides however shared a common government intervention that simultaneously cast doubt on the openness of China’s markets while displaying that China’s government can and will play a heavy hand in its domestic markets. The effects of this top down control remain to be seen, but for now, the government is pulling many measures to prevent a collapse.

 

These efforts include a 50bn yuan ($8.05bn) injection into the lagging market by the People’s Bank of China (PBOC). The central body also attempted to create confidence by insisting that the country’s main economic indicators were steadily improving though their fierce market intervention was anything but optimistic. The China Securities Finance Corporation moved fast to condemn those profiting of the market downfall by issuing a stern warning that “Any malicious trading will be investigated and severely punished.” Further measures included halting trades, bans on new initial public offerings, slashed interests rates and similar measures. Though these measures worked temporarily for a few weeks in July, the latest drop at the end of the month calls for more intervention lest they let the market run a natural cycle, or indeed face its own needed correction.

 

Down but not Out

 

What the Chinese government can take solace in most is that stocks account for only about 9 percent of household wealth in China, meaning relatively few Chinese have felt the adverse effects of this turbulent market. The buoyant rise of the market similarly a year earlier also had little economic effect on China other than boosting the financial sector itself. Though the dramatic rises and falls of the Shanghai composite were a spectacle to behold, the greater outcome will be much less than a purported bubble that was to bring down the Chinese economy. The greater problem however for this government is now a question of legitimacy on how much economic leaders and planners truly do manipulate its markets, and how much of this control is beneficial for global trade.

 

Locally at least, it seems that the intervention is welcome and most likely necessary. “Investors are afraid the Chinese government will withdraw supporting measures from the market,” said Sam Chi Yung, a strategist at Delta Asia Securities Ltd. In Hong Kong. A staggering $4 trillion has already been lost from stock index’s dismal performance, so naturally any entity that can bring stability is welcome. These efforts can also be observed at the international level, with the recent statement on China’s GDP figures for Q2 2015.

 

7 Percent GDP Growth Rate

 

To little surprise the figure was unchanged from the last quarter, as Chinese sources announced that the GDP growth rate met the official yearly target of 7 percent. Multiple interest rate cuts in the past half year combined with stimulus measures put forth in 2014 have begun to have some traction. Frederic Neuman, co-head of Asian economic research at HSBC expects more fiscal and monetary easing over the course of the next few years to help keep up this growth. He also noted that the structural slowdown in property and heavy industry is now easing, which can ultimately lead to a soft landing and a stabilizing Chinese economy.

 

 The New Normal

 

Old growth drivers like housing developments and steel production are making away for more consumer based growth. There is great faith in retail sales, which have increased 10.6 percent in June over a 10.2 percent prediction. Services expanded by 8.4 percent while exports increased rose for the first time in four months. One example of rising consumer power is the nationwide box office revenue which surged to 20.3 billion yuan ($3.3 billion) in the first half of 2015. This number is especially impressive compared to 2008 numbers, where movie goers only spent 4 billion yuan for the whole year.

 

Time will tell if the shift towards a consumer led economy will be able to stand alone as a driver for the Chinese markets. Even if consumer spending lags in the future, it is clear from the example of the intervention in the Shanghai Stock Exchange that this government is willing to boost and prop up the economy at high costs. With this kind of ardent support from government forces, those who buy from China can rest assured that the Chinese economy will remain stable, which will allow for continued and consistent production from local suppliers. Contact ET2C today to find out more information regarding the status of China’s economy and how it affects global trade.