China. A nation, which, at least in economic terms, has become synonymous with the idea of eternal growth figures, has not had a brilliant few months on the market. Hubris has awakened, and the allegedly pristine economy, which was once thought to be the poster-child of GDP, has begun to show its cracks. The recent six months have been a dangerous; some might say terrifying, time for China. After unprecedented levels of GDP growth, averaging around 10% over the last 30 years, 2015 proved to be its most sluggish since 1990, when the market grew by only 3%. In other words, the market appears to be catching up with China.
The 12th June 2015 marked the first major instalment of this saga, with the popping of a stock market bubble, generated by a series of wild trading sessions, which arrived on the back of investors pouring more and more into the nations economy, in spite of the fact that the economy and company profits were relatively weak. The main cause behind this were retail investors, the common buyer (think mum and dad), who remained enthusiastic in their purchasing, thereby creating a classic bubble, a time bomb waiting to go off. When it did, the Shanghai index lost about a third of its value before it was able to rebound.
In response, the Chinese government gave money to brokerages to buy stocks, whilst also ordering company executives to not sell shares. New company listings were halted, and the central bank cut interest to a record low. This strategy appeared to minimise the damage, however, it nevertheless erased China’s early gains.
the Shanghai index lost about a third of its value before it was able to rebound
However, the worst was still to come. On the 24th August, Shanghai’s main share index lost 8.49% of its total value. Billions of pounds were wiped out on the international stock markets. The following day saw losses of over 7%. Some 2,153 stocks trading in Shanghai and Shenzen fell by the 10% daily limit allowed by regulators, according to the Wind Information Co., which effectively meant that two-thirds of the country’s mainland shares were untradeable, causing many to refrain from trading until the market recovered.
These two days, nicknamed ‘Black Monday’ and ‘Black Tuesday’, also ensnared the international markets, with the Dow Industrial tumbling 3.6%, its lowest level since February 2014. The blue-chip index, a stock index which tracks the shares of the top-performing publicly traded companies, fell by more than 1,000 points, however, it had nevertheless recovered several hours later. Alongside this, stock markets across the region – from Japan to Australia – fell by more than 4%, with many currencies reaching multi-year lows.
Global sell-offs began to emerge, with the main concern arriving from the idea that the Chinese economy was slowing significantly. Two weeks before the Black days, China unexpectedly devalued its currency in an apparent effort to enhance the competitiveness of its exports, instigated alongside several campaigns to stimulate growth.
The most recent calamity occurred at the start of 2016, on the 4th and 7th January to be precise, during which the Chinese stock market experienced a sell-off of about 7%, which sent stocks tumbling on a global level. From the 4th to the 15th January, the nation’s stock market fell by 18%, whilst the Dow Jones Industrial Average was down by 8.2%. During the first fifteen minutes of the first day of trading in the Chinese stock exchange, the stock market fell by 5%, before leading regulators halted trading. After reopening for around fifteen minutes, stocks fell again and trading was forced to be halted once more. The blue-chip CSI 300 Index dropped by 7%, whilst the Shanghai Composite index fell by 6.9%.
An attempted solution to this was the use of a ‘circuit-breaker’, otherwise known as a trading curb, which is a point at which a stock market will stop trading for a period of time in order to combat substantial drops in value. Unfortunately, this failed to grant any advantage to the Chinese economy; instead, it simply helped to establish the worst New Year start in the 31-year history of the Financial Times Stock Exchange (FTSE 100).
China has now entered what is known as ‘Bear-Market’ territory, which is a condition in which prices of securities fall by 20 per cent or more from a recent high. This is the second time in seven months that this has happened. Nonetheless, the Shanghai Composite Index did enjoy some respite and a 2% jump a couple of weeks ago. Coupled with some positive trade data, some fears concerning the capabilities of the economic megalith are beginning to decline. Alongside this, China’s property market has started to pick up again, and urban unemployment remains unchanged at 4.05%, although this figure may not reflect the truth of the matter.
China’s property market has started to pick up again, and urban unemployment remains unchanged at 4.05%
On the other hand, China’s bank lending slowed last month, a factor which arrived around the same time as when the circuit-breaker mechanism was scrapped. In other words, signals are mixed to negative. Indeed, Central Bank action to temper the depreciation has brought China’s foreign reserves down to around $3.3 trillion, from around $4 trillion in the middle of 2014.
Part of the overall problem arises from long-harboured doubts concerning China’s growth data. The government has a noted habit of closely matching official forecasts year after year, in spite of both local and global circumstances that would be expected to render said predictions inaccurate. In a report published by Fortune Magazine last year, it was found that a county in the Liaoning province reported extra fiscal revenue of 847 million yuan (around $131.1 million) in 2013, a figure that was actually 127% higher than that actual figure. The province itself reported a GDP growth figure of 9.5%, which was far above the current figure over the first three quarters, namely 2.7%.
One paper, authored by a Senior Advisor to The Conference Board’s China Centre, Harry Wu, estimated that China’s GDP between 1978 and 2012, actually grew by 7.6%, a figure that would be 2.6% lower than the official 9.8%. China’s bravado has allowed it to encourage a consistent stream of finance, however, with its growth slowing and scepticism rife, it is unlikely that such a renaissance will continue. Clarity itself has been a key theme of the international response to China’s woes, with Christine Lagarde, the Managing Director of the IMF, calling upon China to accept “clarity, certainty, one message” at the 2016 World Economic Forum at Davos, Switzerland.
One emerging problem here is China’s debt, which, safe to say, is probably quite large. Officially, it stands at 41%, but, as I’ve hinted previously, it’s probably safe to discredit that number. Some believe it to be around 207%, and many market experts believe that its debt has been growing at twice the rate of its economy over the last five to seven years. Credit agencies and financial markets have yet to factor in its effect on the price of Chinese financial assets, a factor further computed by the simultaneous government ownership of both the creditors and the borrowers, which concentrates, as opposed to disperses, the credit risks. This then creates the potential of a systematic collapse – one only needs to look at Greece to see the aftermath of such an event (only much, much worse).
To make matters worse, the government ownership of banks, pension funds and common corporations has created a state wherein both creditor and borrower are branches of the government. These government-owned banks lend money directly to government owned corporations, who are behind the “investment” bubble, a key engine in China’s economy. Should China continue to falter, and if creditors start to demand money from the borrowers, the lack of information provided about what China actually owes to various companies and nations could yield significant detriments.
both creditor and borrower are branches of the government
It’s entirely possible that, in time, China will recover. Many strategists are now proclaiming that our fears have been exaggerated, and that there is little to worry about. Indeed, there are signs of a recovery in certain areas; border nations stocks are picking up, and China itself is beginning to see typical growth figures emerge every now and again. It is unlikely that this will be the cause of the apocalypse. Nonetheless, the slower market activity and undoubtedly high debt levels still leaves one in a state of concern. The Yuan has depreciated by almost 6% against the US Dollar over the last year, almost touching a five-year low, which doesn’t exactly fill one with confidence.
The rosy future of 3.4% global growth, as predicted by the IMF, will be as much decided by what happens next in China as it will be by low oil prices. Whilst hope remains that things will pick up again, and lead to a renewed period of stability, others are not so sure. George Soros — the noted financier who famously aided in taking Britain out of the European Exchange Rate Mechanism by betting against the pound — claimed that a hard landing for China was now “unavoidable”. Soros stressed that he was not offering a prediction. “I’m observing it”, he claimed. If this is true, then it looks like the global economy will be in for a bumpy ride. In spite of the fact that China’s economy is still largely an internal one, its jolts are felt across the world, and for such a titan to fall would undoubtedly throw markets into turmoil. Although it is unlikely that we’ll need a canned food store and a bunker, it would nonetheless be advisable to keep your eyes on the markets. We could be in for a rather interesting few months.