Grow Magazine

Why China is shocking world markets

January 2016

Investor worry over China has wiped $85 billion off the ASX.

China’s currency and economic woes are scaring world markets, reports Mark Mulligan.

China's new growth model is showing signs of strain as Beijing again on Thursday marked its currency sharply down and was forced to suspend stock trading for the second time this year after shares plunged 7 per cent at the opening.

Thursday's market turmoil, which drove Australia's leading sharemarket index, the S&P/ASX 200, down a further 2.2 per cent, came as the World Bank cut is global growth outlook by 0.4 percentage points to 2.9 per cent.

By end of trade Friday, January 8, the S&P/ASX 200 had slumped 0.4 per cent, continuing its downward trend.

The latest bout of turmoil, which has contaminated sharemarkets across the region and drove the Australian dollar to a two-month low, prompted billionaire investor George Soros to warn of a second global financial crisis in less than a decade.

"China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world," Soros said. "A return to positive interest rates is a big problem for the developing world."

He said the current environment reminded him of "the crisis we had in 2008".

The World Bank also warned of the risk of a disorderly growth slowdown in one of the major emerging markets at a time when global growth remains sluggish and a former powerhouse economy, Brazil, is in deep recession.

Chinese regulators announced new measures aimed at avoiding repeats of this week's massive equity sell-off, which was triggered on Monday by worse-than-expected manufacturing data.

Share trading was suspended in China on Monday after a 7 per cent dive in the main indices.

The People’s Bank of China then triggered more global unease on Wednesday with a larger-than-expected cut in the renminbi's reference rate, followed by an even bigger one on Wednesday.

New rules, new worries

Analysts say some of the adjustment reflects company buying of US dollars to cover external liabilities and to hedge against further falls in the renminbi, the currency of China.

Under China’s new share selling rules, major shareholders cannot sell more than 1 per cent of a listed company's share capital through stock exchanges' centralised bidding system every three months.

In addition, they must file their plans 15 trading days in advance of a sale, the China Securities Regulatory Commission said on its website.

It said the rules were aimed at avoiding the effect of "intensive and massive" share reductions from listed companies' senior executives and big shareholders.

The new rules "will help stabilise market expectations and ease panic", the commission said, and hinted of further intervention to stop the current rout running out of control, as it did in July and August last year.

However, the new ad hoc controls did not sit well with fund managers and analysts.

"This is crazy," Alberto Forchielli, founder of Mandarin Capital Partners, told Reuters. "Chinese regulators set off on this path in July and they cannot get out of it. They have ruined whatever hope investors still had in the market."

How will the RBA react?

China's – and the world’s – woes are certain to weigh heavily on the Reserve Bank of Australia's thinking at its first policy meeting for the year on February 2, said HSBC chief economist for Australia, Paul Bloxham.

"The RBA will be very closely watching China and what's going on in China at the moment, because it's our major trading partner and it has a big bearing on our growth outlook," he said.

More important, he said, was the sinking oil price, which was on Thursday trading at an 11-year low, with little respite in store.

RBA's surprise initial cut, in February last year, followed a sharp fall in the oil price and related downward revision to the inflation outlook, amid early signs that domestic growth had slowed markedly in the fourth quarter.

"It could have a bit of a deja vu feel about it when it comes to the oil price story," he said.

"Because what happened subsequently is that a whole series of central banks decided to cut interest rates early in that year in large part because oil prices had forced all their inflation forecasts down."

Global growth gloom

HSBC head of global emerging markets foreign exchange research, Paul Mackel, said on Thursday that monetary and currency easing by China was stoking renewed fears about global growth and market stability.

"Looking on the radar screen for market importance at the moment, the ECB [European Central Bank] doesn't seem to be in play as much, neither does the Bank of Japan; the Fed's [US Federal Reserve] hike is a little bit in the rear-view mirror for now, so the big macro theme that the market wants to hang on to, comes down to China and the renminbi," he said.

"I believe this type of focus is going to remain very entrenched over the coming weeks and everyone is going to be trying to gauge just how hands-off the authorities are going to be in allowing the exchange rate to fluctuate."

China's transition from a manufacturing-heavy exporter to a modern consumer and services-led economy has hit energy and metals prices hard, undermining economies as diverse as Brazil, Australia and Nigeria.

It also last year unleashed market ructions that played a role in the US Federal Reserve's surprise decision to postpone its first interest rate rise in almost a decade from September to December last year.

with Reuters

Copyright Fairfax Media 2016

January 2016