Stockmarkets sold off on fears the shortage of liquidity could push China into a credit crunch similar to that seen in the US and Europe between 2007 and 2009.
It followed a move by the Chinese central bank, the People’s Bank of China (PBoC), to inject cash into some of the country’s biggest banks, having initially refused to do so, after short-term interest rates spiked.
Chinese interbank lending rates – an indication of how willing banks are to lend to each other – spiked suddenly to almost 10 per cent for seven-day deposits late last month.
The move was widely agreed to be a symptom of the Chinese government’s attempts to slow the growth of its loan markets.
The turmoil sparked a rapid sell-off in Chinese stockmarkets, with the Shanghai Composite index falling 9 per cent between June 17 and June 24, capping a six-month decline of 12.1 per cent. It also added to the declines in western stockmarkets, which had sold off following the Federal Reserve’s comments about the tapering of quantitative easing.
Gary Greenberg, head of emerging markets at Hermes Fund Managers, said the move was the first part of the new Chinese government’s longer term plan to reform its economy, and predicted further “subdued” markets for the next 12-24 months.
“China is undergoing phase two of its economic transformation but this is not going to be a particularly joyous ride,” he said. “The market is cheap, though, so I don’t think there is a big crash on the way, but I don’t see a lot of upside either.
“The reaction in the market was much more extreme than expected – the government will have to find a more delicate way of [reforming].”
Mr Greenberg added that the number of bad loans in the Chinese financial system was likely to rise as the economy slowed, something which the government had to prepare for.
Dominic Johnson, chief executive of specialist emerging markets boutique Somerset Capital, said China’s government was “trying to do good things”.
But he warned of the potential wider impact of a Chinese slowdown on emerging markets because of the country’s influence on prices across other markets and asset classes.
Psigma chief investment officer Tom Becket said China’s actions were “sensible, overdue and will lead to a more balanced economy”.
He added that he would be looking for investment opportunities “in the coming months” in China.
“With issues surfacing in Brazil, Turkey, China and other emerging markets, this may seem a foolish thing to be considering, but at some point it will provide a great time to increase exposure,” he said.
Philip Ehrmann, manager of Jupiter’s £195m China fund, said the turmoil in China had been “blown out of proportion” and was being talked about in “very alarmist terms”.
The sharp stockmarket falls have all but wiped out his fund’s strong performance so far this year, which the manager described as “very frustrating”.
“China is heading in the right direction,” the manager added. “This is about the Chinese government saying: ‘These are the rules and this is how you play’.
“For me, we will see the most important reforms in the next 6-12 months.
“This will involve forcing banks and state-owned enterprises to lend and borrow at the right price. If we don’t see these reforms from the premier and the president then that becomes a more worrying situation.”
Somerset’s Asia analyst George Birch Reynardson added that the company’s funds were underweight China but the team did hold one small Chinese bank, which had been “very badly hit” by the sell-off.
