As the world focused on Greece over the past few weeks a separate crisis emerged in China – with potentially far worse global consequences – which saw the country’s stock markets lose more than 30 per cent of their value from mid-June until last Tuesday.
Chinese investors – representing 14 per cent of the total Chinese population – lost over $3.4 trillion in equity value from the markets, which is equivalent to roughly 13 times the size of the Greek economy.
Last Wednesday, the Shanghai Composite, China’s stock market index, slumped by as much as eight per cent, leading some analysts to call the trading day Black Wednesday.
On Thursday China’s two stock markets closed higher, but only after extraordinary measures by the government halted trading on half of the listed stocks and state-backed investors poured billions into the biggest companies.
Jesmond Mizzi, managing director of Jesmond Mizzi Financial Advisers Ltd, said such a large wipeout of over $3 trillion came about as a result of panic selling as investors “either locked in their profits since the lows of 2008 or cut their losses short”.
However, he explained, in the last two trading sessions of the week, the market recovered some of the losses as it gained just over 10 per cent in 48 hours.
Mr Mizzi says a spillover from China’s stock market to the real economy will have a major impact on the global economy, due to China being a main player in global growth.
Chinese investors lost over $3.4 trillion in equity value, equivalent to 13 times the size of the Greek economy
“China’s negative prospects compounded with the Greek crisis, have already been felt in the commodities market, with copper falling to levels not seen since 2009. Mohammed El Erian, former chief executive officer and co-chief investment officer at Pimco, stated that ‘unlike with Greece, the US and American investors, are much more exposed to the spillover effects from China’. The significant sell-off over the past weeks resulted in an unfavourable wealth effect, curtailing consumption, as well as setbacks to China’s financial liberalisation process.”
He said that if the economy in China is curtailed, this would lower demand for
US exports and harm corporate profits. Furthermore, as China draws on its huge international reserve holdings to support its domestic markets, there is a greater risk that China’s investments in the US will be put under pressure.
“The sell-off has potential social and political consequences, too. Having bought investments relatively late, many small investors are being particularly hard-hit by the rout,” he said.
Stephen Calleya, director of the Mediterranean Academy of Diplomatic Studies, said that to date the slowdown seems to be more of a correction than anything else after a tremendous bull market run.
“If economic instability in China is however not limited in duration then it will certainly undermine the efforts of both developed and developing countries to improve their economic outlook since the financial global downturn of 2008. A return to a healthy Chinese investment climate is necessary if the current stock market collapse is not to have lasting global economic consequences.”