Chinese contagion spreads to Australia, but it’s not as bad as it may seem.

“The worsening Chinese economic situation may seem to be dire, but it is important to put it into context,” says UNSW Australia’s Vic Edwards, and who has been analysing the Chinese share market collapse over recent weeks. 

“The selloff seems extreme, but many of the fundamentals in China are solid,” he says. “However there seems to be a major inability of both the Chinese government and Chinese investors to handle an ‘unregulated’ stock market.”

The Australian share market has plunged, mirroring global markets which are undergoing a major selloff, as doubts mount over China's economy.

“Quite simply, the Chinese expected the market to react in the way they dictated. That didn’t happen, and it’s been quite an object lesson in market forces for both Chinese regulators and Chinese investors,” says Vic Edwards, a Visiting Fellow in Banking and Finance at UNSW Business School.

He believes Chinese investors do not use the usual investment strategies that operate in western markets. They have always taken their cue from Government announcements. 

“Investors now have to pay attention to market fundamentals - should they invest in a company that has shown no growth simply because government officials have hinted that they should? Should they stop investing because the government has foreshadowed that they will intervene in the market and close it down?” he says. “The Government too is learning that it is tougher to control true market forces than merely issuing and edict. The truth is that both regulators and investors are learning how to behave in a free market.”

The Shanghai Composite Index is down around 20 per cent in 2016, wiping hundreds of billions of dollars off the total market capitalisation of the index. China's vice president now says the government will intervene to tamp down market volatility.

“Though Chinese stock-markets are still somewhat insulated from world markets by the Government’s capital controls, the figures do show that investors are as aggressive in selling in a falling market, just as they were aggressively bullish when buying high tech stocks in a rising market.”

He says the Chinese economy is going through a natural switching process from an export orientated economy to a local consumption orientation. 

“Recent refined studies of China's dualistic economy now show that the tilting point where China switches from being export-oriented to being a strong consumption economy is likely to occur closer to 2020 rather than 2015 as first thought. This will make things just a little more difficult for China to navigate its way in the coming three years.”

He says it is also important to look at the property market in China, which he says displays what is called ‘dual tracking’. “In first tier cities such as Shanghai, Beijing and Tianjin, large developers have been extremely competitive and have pushed land prices to record levels - more than $9,500 per square metre. Individuals looking for an apartment are still finding prices high though inventories are beginning to build up. However in second and third tier cities and regions, the inventory of both land and housing has been building up and property prices have been falling. It is this build-up of inventory and the pressure to destock that is putting downward pressure upon China's growth rate.”

For further details contact Vic Edwards on 0412 445 668, or v.edwards@unsw.edu.au