As the Chinese stock market crash moves into its third week, there are mounting fears of contagion.
Despite the fact that China is still a fairly closed market, there is great deal of international interest in Chinese securities, even if there is not much ownership. Only 1.6% of Shanghai market-cap is foreign owned.
Funds Europe provides a sample of market commentary.
Nigel Green, chief executive officer of DeVere Group
“Much of the world’s attention is on Greece right now. Whilst it is right that investors keep a close eye on the Greek saga, one eye must remain firmly on the burgeoning crisis in China.
“With the Chinese stock market losing a third of its value since mid-June, which is about equivalent to the UK’s entire economic output last year, or in other terms the GDP of Greece every two days for the last ten days, this has all the makings of morphing into a major financial crisis.”
Jeremy Lawson, chief economist, Standard Life Investments
“A hard landing in China would obviously be a large negative shock for the global economy, representing as it does 12% of global GDP and 18% of global manufacturing exports. Some countries stand to lose the most from any failure of China to stabilise growth. On the commodities front, countries like Australia, Brazil, Canada, Chile and Peru stand out. In manufacturing - Hong Kong, Korea, Malaysia, Singapore and
Taiwan are most exposed. Whilst developed economies like Germany export a sizable amount of capital goods to China.”
Desmond Tjiang, portfolio manager of Hong Kong and Greater China Equities at Pinebridge
“The recent government intervention and the suspension of trading for as much as 20% of A-shares, based on market-capitalisation, has raised moral hazard concerns, as well as highlighting issues relating to liquidity and capital controls.”
“The reform agenda also seems to be slowing, given the government’s near-term focus on the stock market. Therefore, two of the factors that we were previously positive on China – namely, liquidity and reform - have been put on hold for now.”
Sean Yokota, head of Asia strategy at Nordic bank, SEB
“We’ve been in Shanghai for the last 1.5 weeks and we think there are three reasons to not be overly concerned. First, fundamental risk, such as economic growth, is limited. China’s equity market is disconnected from fundamentals and doesn’t correlate with real GDP growth. The equity market is young and more influenced by liquidity conditions and shift in government policy, such as financial market liberalisation. Just as the equity market rise hasn’t boosted the economy, the fall shouldn’t hurt as well.
“Second, risk to the financial system is small. Fall in equity market is not leading to tight liquidity conditions. Banks have had limited impact from the collapse in equity market. They did not participate in the huge surge in the market over the last four months and their share price has remained stable.
“Third, contagion risk is limited. Foreigners own 644 billion renminbi (€95 billion) or just 1.6% of the Shanghai market-cap. There is little risk of foreign capital outflow that will make the equity sell off lead to currency instability. If your capital account is closed, you don’t need to impose capital controls like Greece.”
©2015 funds europe