The Chinese stock market has lost around a third of its value, around $3tn (£1.9bn), over a one month period after it had more than doubled in size during the last year.
The Chinese stock market has lost around a third of its value, around $3tn (£1.9bn), in just one month after it had more than doubled in size during the last year.
The Shanghai Composite index, a capitalisation-weighted index that tracks the daily price performance of all A and B-shares listed on the Shanghai stock exchange, fell from a high of 5,166 points on 12 June to a low of 3,507 points on 8 July. Despite this drop, the market is still 70 per cent up on a year ago.
The fall has raised questions about the health of the Chinese economy as a whole.
China’s economic growth remained stable in the second quarter and slightly ahead of forecasts, coming in at 7 percent year-on-year. The nation’s reliance on property and construction activity have slowed, meaning that growth projections have become less inflated by unproductive investment.
GDP growth in the country rose 7 per cent year-on-year for the second quarter of 2015 (down from 7.5 per cent in the same period in 2014). Consumption in the nation continues to increase, accounting for 60 per cent of China’s growth in the first half of the year – the highest level in six years. The turnover of all domestic exchanges soared by 607 per cent year-on-year during the second quarter, compared with 8 per cent during the same period in 2014. According to Matthews Asia, this is due to a strong contribution from the broking industry, as the domestic stock market correction only began in June.
Optimism about the future of Chinese growth remains despite the market correction. The slump could present good buying opportunities for investors, as growth in the nation remains strong, and a growing population and further drift to urbanisation will continue to foster long-term consumption.
The risk of contagion to other markets, particularly those more developed, should be minimal. David Smith, manager of the Henderson High Income trust, said, “People often see China as an indicator of global growth, but that’s not the case. When you look at global growth and the Chinese market, there’s really no correlation.”
While the Chinese market has become more open, policy response to the crash has run contrary to previous liberalisation, and has included limits on index short trading, margin trading levels, and the ability to hedge investments, all in an attempt to prevent speculative buying and stabilise the market.
Regulators have imposed a six-month ban on major shareholders, corporate executives and directors selling shares in listed companies.
But these restrictions may have worked counter to the government’s intentions, as it may have led frustrated investors to exit the market. The volatility in the market and unpredictable regulations demonstrate the risks associated with investing in emerging markets, and China’s immature relationship with capitalism.
