Schroders: China’s crashing market could hurt growth

Craig Botham, Emerging Markets economist at Schroders, comments on the recent fall in the Chinese market.

China’s market has provided perhaps the most exciting ride for investors so far this year. The composite index was at one point up almost 60% since the start of the year, easily outpacing the rest of the emerging markets and indeed the rest of the world, but its fortunes have since turned.

The timing of the rally – with take-off in March – suggested a disconnect from economic fundamentals. Activity data started the year poorly and then disappointed spectacularly in March; hardly the environment for earnings to perform well. But along with weak data came expectations – and promises – of policy support. Liquidity injections by the central bank in particular helped build sentiment, and a mindset that said that every disappointing data point from now was a signal to buy more. While undoubtedly a bubble, in the sense that the elevation of price-to-earnings (PE) ratios is difficult to justify in an economy suffering excess capacity and weak demand, investors were arguably not behaving entirely irrationally.

The rally had a great deal of policymaker support. The authorities are seeking to rebalance the financing mix of corporates, away from a high reliance on debt. For this to succeed, firms will need equity finance, and a buoyant stockmarket provides the best conditions for a series of IPOs. Banks are also looking to raise equity finance as they seek to recapitalise, which will help provide demand, in turn, for local government bonds – another aspect of the country’s rebalancing. All the same, we have seen large one-day falls in the market when the regulator has moved to reduce volatility, which pointed to the fragility of the bubble. Unfortunately for investors in Chinese equities, one such action by the regulator – restricting margin financing, which has set global historic records by reaching 3.4% of GDP – prompted an ongoing sell-off.

Mona Dohle
Mona Dohle speaks German and Dutch, she is DACH & Benelux Correspondent for InvestmentEurope. Prior to that, she worked as a journalist in Egypt and Palestine. She started her career as a journalist working for a local German newspaper. Mona graduated with an MSc in Development Studies from SOAS and has completed the CISI Certificate in International Wealth and Investment Management.

Read more from Mona Dohle

Close Window
View the Magazine

I also agree to receive editorial emails from InvestmentEurope
I also agree to receive event communications for InvestmentEurope
I also agree to receive other communications emails from InvestmentEurope
I agree to the terms of service *

You need to fill all required fields!