The Impact of the China Stock Crisis

Capital & Economics

Opinion Roundup: The Impact of the China Stock Crisis

October 15th, 2015

Overview

Summer 2015 was a turbulent time on the markets. Within a month of June 12’s first crash, a third of the value of A-shares on the Shanghai Stock Exchange had been lost, with further falls of 8.5 percent on July 27, and another fall of nearly 9 percent on August 24. This was in spite of robust efforts by the Chinese government to clamp down on short selling, providing funds to buy shares, and a state-orchestrated currency devaluation in early August, among other measures that included the arrest of 197 people for “spreading rumors” about the stock market.

With China the world’s largest exporter and second largest importer, according to the latest World Trade Organization figures, one thing is certain – a Chinese slowdown is bound to have far-reaching implications. The impact of the summer crashes was felt in markets around the world, leading some to wonder if this could be the start of a new global financial crisis.

Despite this, the Shanghai Composite Index remains up year on year, and Chinese growth remains high. Across the world, economists, analysts and businesses are still trying to work out what the implications are – and whether we’ve seen the last of the instability. Yet with official Chinese data notoriously unreliable, there is much disagreement on the true situation – and it likely remains too early to assess the outcome.

For now, we’ve rounded up some of the more interesting and explanatory takes from around the world to help get a sense of the range of opinion. The only thing that is certain – with China long been dubbed the engine of the global economy due to its double-digit growth, especially in the years following the 2007-8 financial crisis, any indications of its slowdown being sharper than expected could be cause for serious concern.


In Depth

Some countries may be unprepared

“Market turmoil always makes for great headlines. But the real story coming out of China is its continued economic deceleration… The slowdown is necessary as Beijing transitions from an export-oriented economy to a more sustainable consumption-oriented one. Yet, the rising tide of anxiety outside China in recent weeks makes clear that some countries aren’t yet ready for what China’s president has called a ‘new normal.’”
Time: These 5 Facts Explain the Global Impact of China’s Impending Slowdown, August 28, 2015

“The crisis may have passed, or paused, but the broader slowdown story is by no means over… Even though Asian economies are in better condition and their balance sheets safer than 18 years ago, some impact on growth is inevitable because China is buying less and that’s the way it is going to be for a few years.”
The Straits Times: Asia Beyond the China Slowdown, September 4, 2015

The impact could be overstated

“The current panic is essentially ‘made in China.’ The recent data from other major economies, including the U.S., Eurozone and Japan, has generally been good… Aside from the bad news in China, there is very little to support fears of a major global downturn.”
Julian Jessop, Chief Global Economist, Capital Economics, August 24, 2015

“What I really hope is that we go back to not caring about Shanghai Comp. Remember that this was a bear market from 2007 until June last year. The poor market’s only up 45 percent in the last 12 months, and that never seems to come up. I don’t understand why people associate it with the economy.”
Adrian Mowat, JP Morgan on CNBC Squawk Box, August 31, 2015

“While risks do exist surrounding the Chinese financial bubbles, our central scenario remains that a hard economic landing will be avoided. We also think that the renminbi devaluation most likely reflects a step towards liberalization of China’s financial markets rather than primarily an attempt to gain international competitiveness.”
Lucinda Downing, Senior Consultant, Aon Global Asset Allocation Team

It may all be according to plan

“It’s true that the Chinese economy has come under downward pressure… The ‘shape’ of the economy is that there have been some ups and downs, but the underlying trend remains positive… There are also positive changes in the economic structure… we will continue to develop a multi-tiered capital market in China and pursue a market-driven and law-based approach… The purpose is to establish an open and transparent capital market of long-term, steady and healthy growth.”
Li Keqiang, Premier of the State Council of the People’s Republic of China, September 10, 2015

“As the Chinese economy is adjusting to a new growth model, growth is slowing – but not sharply, and not unexpectedly. The transition to a more market-based economy and the unwinding of risks built up in recent years is complex and could well be somewhat bumpy… Other emerging economies… need to be vigilant to handle potential spillovers from China’s slowdown and tightening of global financial conditions.”
Christine Lagarde, Managing Director, International Monetary Fund: Poised for Take-Off – Unleashing Indonesia’s Economic Potential, September 1, 2015

But concerns shouldn’t be dismissed

“A global growth-recession scenario ‘made in China’ is perfectly plausible… We are not talking about the sort of disaster that accompanies a global financial crisis. But the world economy will remain vulnerable to adversity until China has completed its transition to a more balanced pattern of growth, and the high-income economies have recovered from their crises. That is still far away.”
Martin Wolf, The Financial Times, September 15, 2015

“China’s slowdown has already had global consequences. The country’s voracious appetite for raw materials (oil, grains, minerals) fueled a commodities bubble that has now burst. Prices soared and have now fallen sharply… Commodity producers… have been hit hard. They (and almost everyone else) overestimated China’s long-term growth prospects. Their miscalculation represents a huge drag on the global economy.”
The Japan Times: Will China Crash and Follow in Japan’s Footsteps?, September 7, 2015

“More than 40 percent of investors now see weak growth in China and other emerging markets as the main risk to financial markets over the next 12 months”
The Wall Street Journal: Shanghai Shares Surge in Late Trading, September 16, 2015


Talking Points

“Companies need to… ask not just how a Chinese recession impacts their China business, but whether a Chinese recession, or even just a substantial slow down, will tip the world’s economy into recession” – Forbes

“Most economists, including those at the IMF, think it is premature to talk about an economic crisis. While I agree, I nonetheless believe that the slowdown is due, in part, to an acceleration of ‘near-shoring,’ the practice of producing closer to the customer… The current turmoil in China will most likely accelerate the trend to near-shoring.” – David Simchi-Levi, Professor of Engineering, Massachusetts Institute of Technology, in The Harvard Business Review

“There is cause to worry about China’s economy, but… there are plenty of reasons to be hopeful as well. Growth may be sagging, but even if, as many believe, it is only 5% today, that represents more economic output than the 14% seen in 2007 because the economy is so much bigger.” – The Economist


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