China’s Black Monday

By Robin Bladen-Hovell, Director of the Keele Management School

The decline on the Chinese Stock market a fortnight ago was the most serious of a series of declines that has seen the Chinese market shed almost 40 per cent of its value since early June, reversing all of the gains achieved in 2015.  The shock wave from the most recent fall has been felt globally, with European and American markets tumbling on the news.

The Bloomberg Commodity Index hit a 16-year low on 24 August 2015

The Bloomberg Commodity Index hit a 16-year low on 24 August 2015

Market movements of this scale are clearly a cause for concern; in the case of China, more because of the global contagion effects than the direct impact of the collapse in China.  Financially, share-holding represents a very modest 15% of household financial assets in China and although many of these shares have been purchased through credit, the leverage is too small to have major effects on household consumption or the Chinese banking system.

More important is what the decline tells traders elsewhere in the world about the state of the Chinese economy.  There has been growing anxiety in recent months about the state of the Chinese economy with evidence accumulating of a slowdown in growth. Such a slowdown is likely to have consequences at a global level and we are already seeing commodity prices such as oil declining.  A slowdown in China’s growth will also make it much harder for other economies, including Britain, to achieve the growth they require in order to continue consolidating public debt following the 2007 financial crisis.

Politically, the Chinese Authorities have invested significantly in recent months supporting the

Chinese investors look on as share prices fall in Nanjing city Photograph: Imaginechina/Corbis (via theguardian.com)

Chinese investors look on as share prices fall in Nanjing city Photograph: Imaginechina/Corbis (via theguardian.com)

market and moderating losses.  Political success has become entwined with market strength – a perilous position for the authorities to place themselves in.  That support was withdrawn on the so-called ‘Black Monday’ and the concern must now be that that the Chinese market will fall further as private investors withdraw funds in response to the change of policy.

Markets dislike uncertainty and we can expect to see further swings in the Chinese market until the new policy regime settles in.  With China the second largest economy, the effect of these swings will continue to reverberate around the world.  In these circumstances, concern is clearly merited.  The real problem begin when concern turns to panic.

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