InvestmentsSep 24 2015

Five things: China’s options

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Five things: China’s options

3. What sort of action can China take? Beijing first needs to stop meddling with the market directly. Attempting to re-inflate stocks will do more harm than good. Western investors are not used to governments intervening directly in the market as was the case in China, so this could deter them from further investment.

Mr Williams estimates that stocks in mainland China were supported by $200bn of direct investment before August’s devaluation. This was not sustainable over the long-term, so the motives to weaken the currency should not have been surprising. China is currently running real interest rates of around 4 per cent, so there is room to cut rates if need be. And if that does not work, Beijing could always give a round of QE a try.

4. What does this mean for the US and the UK? Analysts have been guessing when the next rate rise would be, by how much, and whether the US or the UK would take the plunge first. If volatility in China continues, sentiments from Ms Yellen and Bank of England governor Mark Carney may become increasingly dovish. It may also lead many investors to look more towards these developed markets now that emerging markets do not look as appealing as they once did.

5. And for the eurozone? The European Central Bank (ECB) is not likely to raise rates anytime soon, so China will not have an impact on this. Investors may look more towards the eurozone as well as an alternative to emerging markets investments, but negative interest rates could dampen the appeal.

Greece is likely to come back into the headlines in the not too distant future as it is likely to fail on its pension reform, privatisation and fiscal targets. Due to its membership in the eurozone, Greece does not have the options to devalue its currency, increase QE, or adjust interest rates as other nations do. It is therefore likely that any ideas of debt restructuring will likely resurface soon.