Greek contagion spreads to China, as rates cut to calm market

“Though Chinese stock-markets are somewhat insulated from world markets by the Government’s capital controls, the figures do show that investors are aggressive in selling in a falling market, when there is a danger of worldwide contagion from Greece, just as they were aggressively bullish when buying high tech stocks in a rising market. The technology-heavy Shenzhen stock exchange is therefore taking a more severe slide than the Shanghai exchange,” says Vic Edwards, a Visiting Fellow in Banking and Finance at UNSW Business School. 

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The Shanghai Composite Index is down 17 per cent from its mid-June high, wiping hundreds of billions of dollars off the total market capitalisation of the index, although it is still up almost 30 per cent in the year to date.

China has experienced a bull market for about a year says Vic Edwards, “therefore, Chinese investors were overconfident until instability hit the market in May. Some got out early, while others thought the market was merely correcting itself with no longer term implications. In China, investors primarily buy on the sentiments of Government statements, which argues the fundamentals are still sound.”

Chinese officials are now considering lowering stamp duty on stock purchases, which would encourage buying. The central bank has also added more cash into the financial system, following a cut to interest rates over the weekend

UNSW’s Vic Edwards says “the strong cutting back of margin trading - which was the main driver of the upward swing - has also contributed to the downswing. However, market regulator, the China Securities Finance Corp said severe pruning of margin trading was necessary to minimise risk. Indeed, only 1 per cent of turnover consists of margin trades, a manageable figure.” 

The People’s Bank of China has cut the one-year lending rate by 25 basis points to 4.85 per cent - its fourth cut since November - and lowered the amount of reserves certain banks are required to hold by 50 basis points.

“The China Government believes that with its Belt and Road Policy initiatives, it is creating many alternative investment and innovation prospects for the future and help to smooth the present volatilities in the market. Both Xi Jinping and Li Keqiang have taken many initiatives to boost China’s world trade including the signing of the FTA with Australia. It has also taken the initiative to set up the AIIB that will provide additional funding to create the necessary infrastructure for the future.”

Vic Edwards is currently in China. For further details contact Vic Edwards on +86 131 2 1099 172

Media contact: 

Julian Lorkin: 02 9385 9887