What has been dubbed ‘The Great Fall of China’ is being seen by both local and overseas analysts as a much-needed correction, with European stock exchanges already bouncing back from the dramatic drops on Monday.
The People’s Bank of China yesterday cut its main interest rate by 0.25 percentage points – the fifth cut since November – to 4.6 per cent after two days of stock market turmoil which saw major Chinese stock indexes nosedive more than 15 per cent.
The interest cut soothed jangled nerves in Europe, with the FTSE 100 in London jumping 3.3 per cent, the Dax in Germany up by 4.4 per cent, and the Cac in Paris ahead by 4.6 per cent. Lisbon, Madrid, Moscow and Milan were all sharply higher.
The question on everyone’s lips was whether the dramatic events of the past days would spiral further out of control and spread across other economies – or whether the initial knee-jerk reactions on the stock markets would eventually fizzle out.
Much will depend on whether the measures being taken by China will help boost growth, perhaps not in the short term but at least in the medium term.
China is struggling to keep its economy on course to grow seven per cent in 2015 – its slowest pace in a quarter of a century. Last Friday a survey showed Chinese manufacturing had slowed the most since the global financial crisis in 2009, adding to other worrying clues about the country’s health, including its falling exports.
Australian Prime Minister Tony Abbott, whose country is heavily exposed to China, said it was important for people not to “hyperventilate “It is not unusual to see bubbles burst in particular markets and for there to be some flow-on effect in other stock markets, but the fundamentals are sound.”
Reuters reported that a majority of analysts predicted a continued deceleration – rather than a crash – and dismissed comparisons with the 2008 global financial crisis or the 1997/98 crisis in Asia.
More time is required to see whether this correction and heightened volatility across markets will evolve into a fully fledged crisis
“The recent data from other major economies have generally been good and there is little to justify fears of a major global downturn,” wrote economists at Capital Economics.
“China’s recent economic data suggest that growth remains sluggish, but are not weak enough to justify fears of a hard landing.”
Asked whether the events of the past few days were the start of a real meltdown or just a knee-jerk reaction, economist Philip Von Brockdorff said it was probably a bit of both.
“There’s no denying that billions upon billions of stock values have been lost in a matter of hours. This stock market crash is a reflection of concerns arising from a slowdown in China’s economy which is now worse than feared – this despite China’s central bank having devalued the currency, the yuan, a few weeks ago.
“Clearly, the markets are responding to the slowdown, especially those relying heavily on strong demand from China like the US, Russia, India and the EU. Further, without reassurances from China’s government about its economy, investors have reacted by selling stocks,” he said.
Looking ahead, Prof. von Brockdorff said that if the Chinese government has responded effectively and within a reasonable time, the current situation should not become a global crisis as bad as that of 2008. “However, I’d be surprised to see China return to its previous levels of economic growth, and this accompanied by a weaker yuan will make European exports less competitive,” he said.
The governor of the Central Bank of Malta, Josef Bonnici, also felt that it was too early to draw conclusions about what would happen.
“There is a correction in China which has resulted in volatility, especially in Chinese equities. The devaluation of the currency in small steps led to a lot of speculation and the likelihood of overshooting in the exchange rate,” he said.
Stockbroker Edward Rizzo felt that the writing has been on the wall in China for some time – but what now remains to be seen is whether it uncovers global problems.
“Markets are fearing that global growth is decelerating, following lacklustre economic data that will also lead to a prolonged period of low inflation levels.
“More time is required to see whether this correction and heightened volatility across markets will evolve into a fully fledged crisis. This largely depends on the decisions of the central banks in China and the US and to a lesser extent the ECB, given its commitment to maintain easy monetary policy at least until September 2016,” he said.
Since Malta imports far more from China than it exports there, the devaluation of the currency is not as much of a concern to Malta. Prof. Bonnici confirmed that the fluctuations were expected to have little effect in this respect.
However, Mr Rizzo said it would be hard to say whether the weakening investor sentiment would eventually also filter through to the local market.
“Among the companies listed on the Malta Stock Exchange, the ones which have international operations or whose business is influenced by international developments and international stock market movements are more vulnerable to any downturn. It will take a while to see what impact recent events could have on any of the local companies.”