Solving China’s financial markets puzzle

JP Morgan Private Bank’s Michel Perera (chief investment strategist for EMEA), in partnership with Rajesh Tanna (portfolio manager), discuss the ripples that China’s economic slowdown is causing worldwide, and the implications for European markets.

Michel Perera, chief investment strategist for EMEA, said “When China unexpectedly announced it was abandoning the strong link between the renminbi (CNY) and the USD on 10 August, this move triggered a rapid 3 per cent CNY depreciation before the People’s Bank of China (PBOC) intervened to stabilize the exchange rate.

“At the same time, August 2015 saw the first US equity market correction since 2011 with the S&P 500 Index losing 11% between 17 August and 25 August. The drop was amplified in the euro area where the MSCI EMU Index lost 20% in euro terms, although just 11% in US dollar (USD) terms.

We believe this correction was caused by moderately disappointing US second-quarter earnings figures, as well as uncertainty about the strength of the world economy and the impact of China’s slowdown.

Rajesh Tanna, portfolio manager, added: “These events come at a critical time for Europe. A combination of easier central bank monetary policies, a weaker euro, lower oil prices and stronger growth in the US and UK have all contributed to lifting the region’s growth rate to around 1.5% to 2% in 2015, from around 1% in 2014, and China’s slowing growth could impact these figures as we move into 2016.”

Growth and GDP in China
Michel Perera continues, “The pace of growth in China is slowing as the government seeks to rebalance its economy away from infrastructure, manufacturing and property investments and into consumption and services — two areas that have had a lower rate of growth in the past.

However despite this, China’s contribution to world GDP has not really fallen, due to the size of its economy which has more than doubled in less than 10 years. As the world’s second-largest economy (at current exchange rates), China represented 13% of world GDP in 2014 from 6% in 2007.

“A slower, less resource-intensive China can be seen as a positive for the world economy, even if global growth slows modestly and commodity prices continue to fall. In the latter part of the 2000s, China’s rapid expansion stretched the supply of raw materials across the commodity spectrum. The slowdown and rebalancing of China’s growth model gives commodity supply chains space to re-adjust.”

The impact of China’s slowdown on Europe
“Europe can withstand a gradual, orderly slowdown in China, helped by supportive ECB policies and solid growth in the US and UK – which are two of the region’s key trading partners, comprising 25% of total exports.

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