China and the stock market: How much should we worry?

“I don’t think the performance of the stock market in China is a barometer of China’s economy”. European stocks posted their biggest one-day drop since December 2008. As Gluskin Sheff + Associates Inc. chief economist and strategist David Rosenberg pointed out, it’s understandable that markets see China’s economy as being in worse shape than anyone anticipated given that Beijing devalued its currency for the first time since 1994. Without the market wobble, that would have been the green light for a rate rise.


“These included, among others, cuts in the required reserve ratio, interest rates, taxes and fees and measures aimed at stabilizing the market, which are already paying off”. That fostered expectations the government would intervene if needed to keep the market from falling.

But last week the efforts simply served to spook investors. But by the end of the week, investors who stayed put Monday were in the black. The stock added 24 cents to $10.43.

The FTSE 100 endured a 4.7pc nosedive, its worst one-day loss since 2009. What we don’t need to see is another global crisis that hurts trade and investment. “Not that we can’t go higher, but it’s not going to be an easy path to get there”. For brief periods, the flight to protect against losses was so rapid that the CBOE, which produces the index, was unable to come up with a reading. Of course everyone will be watching the market there, with fears that further falls will follow if the authorities step away from supporting it. While cutting interest rates for the fifth time in nine months, Beijing also tightened rules on short-selling, banned large shareholders from offloading stakes and forced local pension funds into domestic stocks. The Fed tends to treat investors like the recently burgled: reassurance at every stage, no loud noises during the night. The market then rebounded over the next two days. But there have been numerous other tremors in recent months and years emanating from the Western world, not least those related to the Fed’s tortured “definitely, maybe” musings on raising interest rates its reluctance due to fears that itself would crash our bloated financial assets. The government said the move was a nod to reality: Investors were signaling that the currency was overvalued. Markets were learning what China did and how it did it, she said, and China was learning how markets reacted to its actions.

This would in turn restore market confidence and stem the market slide. China was simply the spark for an overdue correction. This ” will they, won’t they” debate will be a big factor in the next few weeks.

Mark Haefele, global chief investment officer at UBS, also suggested that the sell-off was partly driven by risk controls within hedge funds triggering automatic sales, accelerating the pressure to sell. China’s economic statistics have always been dubious.

The apparent cause of the panic selling that began last week was China’s devaluation of the yuan and indications that the country’s manufacturing activity is now at its worst level since the financial crisis. This makes their exports more attractive but could spur an exodus of capital and exacerbate other economic weaknesses within these countries.

China’s economy has a grand 16-per-cent correlation with the U.S. economy, knock-on effects and all.

The Communist government’s next five-year plan will be aired in October, with Premier Wen Jiabao’s desire to move more people into urban centres likely to continue unabated. They were boosted by a US economic growth report that showed the world’s biggest economy expanded at an annual rate of 3.7 percent in the second quarter, sharply higher than the initial appraisal of a 2.3 percent gain. A cheaper yuan gives Chinese companies a price advantage in foreign markets.


“That’s something of a relief, as the liquidity surge has been taken out of the market”, said Ms Yeung at Fidelity. The biggest companies are state-owned and their health is decided by official policy, not the market.

Foreign Exchange Graph