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August 26, 2015

China, Where Global Markets Fears Begin

London, 25 August 2015

China concerns sent waves of fear through global markets in recent days, with hundreds of billions wiped off global stock markets yesterday alone. Signs of economic growth stabilization seen in Q2 2015 appear to have been reversing, and the impact of the summer stock market crash on corporate confidence and investment is still playing out.

As growth sputters, the economy may need more support from traditional growth drivers (increased fiscal spending required?). While the central government has a number of policy levers at its disposal to stimulate growth, and more measures are perhaps likely to be rolled out soon, it is also worth noting that recent intervention to support domestic stock markets may have more closely entwined various parts of China’s financial system and its equity markets, which increases general market uncertainty and could make Beijing somewhat more cautious about broader credit loosening.

A combination of domestic stock market volatility, currency devaluation, weaker than expected economic data and lack of responsive policy support over the weekend sent panic through the global markets yesterday. Views currently appear to be mixed – some fear an impending hard landing, others have suggested the recent panic is overblown and highlighted the disconnect between China’s capital markets and the broader economy. However, to add to the general uncertainties, recent government intervention amidst the stock market crash may have more closely entwined the country’s financial system and economy with the stock market, as discussed below, and the true extent of this is far from clear. Separately, recent market moves may have also reduced the likelihood of a U.S. interest rate hike next month.

Growth sputters – old engine versus new normal

We highlighted in early Aug that it was too early to write off the impact of the summer stock market carnage on the broader economy and that corporate investment would be a key area to watch. Interest rate cuts year-to-date have arguably helped ease some of the hefty debt burdens, however volatility and uncertainty breed caution which in turn impacts investment. This impact appears to still be unfolding. Following recent comments from members of China’s politiburo that “new growth momentum is not sufficient, while the old engine is getting weak,” there appeared to be some acknowledgement among the senior ranks of the central government that growth momentum from the ‘new normal’ was not yet strong enough. State media reported that China’s policy banks will issue up to RMB1tn in bonds which will be used to finance infrastructure projects, indicating more direct state-backed funding of infrastructure projects is coming, which may help bridge the infrastructure ‘funding gap’ seen in H1 2015. This may provide some support to industrial activity later in the year.

Is China’s financial system becoming more closely entwined with the stock market?

Recent interventionist measures may have drawn the financial system closer to the stock market. Regulatory bodies encouraged companies to increase stock market investments; insurers were allowed to invest higher proportions of their assets in equities; the CBRC told banks to roll over loans backed by shares; the PBoC ordered commercial banks to extend loans to the CSFC (with an estimated quota of RMB2tn), which began buying shares and funds directly (domestic media reports indicate more than half of this has already been put to use). Furthermore, there is a lack of clarity on the extent of shadow finance involvement in margin lending in recent months. In the aftermath of these unprecedented measures, previously clear boundaries in the financial sector are becoming more blurred and links may have strengthened between various parts of the financial sector and the equity markets, and the implications are not yet clear. An area to watch…

Ends --

Courtesy Adrian Lunt, Assistant Vice President Commodities - Singapore Exchange via Commodities-Now   

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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