The Chinese stock market contagion is spreading around the world, as renewed concerns on China's economy add to the fear-selling that left share markets in tatters in August, says UNSW Business School's Vic Edwards.
“Things really aren't getting better,” says Edwards, who has been analysing the Chinese share market collapse over recent days. “The China stock market bubble had been developing for more than a year with the assistance of the government. It has now burst spectacularly. The first in a series of crashes started in June and it has now fallen 45% since then.”
However, there is reason for optimism, Edwards argues. “China’s fundamentals in the longer term are still sound and Australia and China’s other trading partners will still benefit from their close trading relations with China.”
Edwards says China saved the world from sliding into a very deep depression, thanks to being a strong engine of growth from 2006 to 2014. “At that time, China had a GDP starting at over 12% but it eventually fell to about 7%. Therefore China maintained a GDP double that of any other country. It is still doing OK now.”
Yesterday, the official factory gauge of the world's second largest economy, the Purchasing Manager's Index, fell from 50 in July to 49.7 in August. Any number below 50 signals a contraction. This in turn renewed concerns about China's economy, which added to the selling that has left share markets including the ASX in tatters in August.
“Despite these numbers, China is still positive about its longer term future. Premier Li Keqiang remains optimistic that the Chinese economy can continue to grow at 'mid to high speed'," Edwards says.
“It should be recognised that China is endeavouring to become a more fully integrated mixed economy. It is still very much a centrally planned economy, and the central planners are still learning how to liberate the equity, debt, foreign exchange and labour markets. The government is learning that free markets may be different from its expectations.”
“The clumsy and ham-fisted attempts by the Chinese securities and regulatory authorities to control the stock-market bubble they had helped to create was in my opinion due to the fact that its central planners had not learnt how liberal market forces operate. They are still wearing ‘learner driver’ plates.”