China – 8,000 miles

I’m sat in the shadow of Beinn Resipol, a remote and moody monument in mountain form, close to Moidart in the Highlands of Scotland. Shanghai is around 8,000 miles away. Still, I can hear the sound of investor panic.

The following extracts from Bloomberg’s daily Economic Brief sum up what’s happening over there…

‘In the second quarter, China’s markets and economy were in a virtuous circle upward. In the third quarter, they are in a vicious spiral down. The Shanghai Composite Index fell 8.5 percent to 3,209.9 at the close on Monday. The index is now down 37 percent from its mid-June high and below the 3,500 mark that many investors expected the government to defend.’


‘All of the forces that accelerated market momentum on the way up are now working in reverse on the way down. The balance of outstanding margin loans has fallen to 1.4 trillion yuan, down from a peak of close to 2.3 trillion yuan in mid-June. The number of new trading accounts has slumped as the “greater fools” to whom speculators had hoped to offload stocks have wised up.’

I don’t doubt that some investors expected the Chinese government to defend stock prices but, for the life of me, I can’t figure out how the government could possibly succeed in so doing; I know of neither mechanism nor precedent. Of course, the government will do something. It will engage more easing – most likely in the form of reduced reserve requirements for banks – and that might go some way to settling investors. But it won’t sustain asset prices for long. And besides, the Chinese government has far larger fish to fry.

China’s economy is slowing. That’s not necessarily a bad thing. In fact, it’s something of a necessity if policymakers are to be successful in re-balancing the Dragon economy toward a more sustainable model – away from debt-fuelled investment on the one hand, toward higher household spending driven by rising incomes on the other. The alternative is worse – economies with over-sized investment tend to slow too, ultimately, but in a much more dramatic fashion. And that would be a disaster for the one party, in a one-party system, whose legitimacy is founded on lifting living-standards. So, the period of transition that China faces is a very difficult one indeed. Success, if it is successful, will be hard won.

In the meantime, China’s slowdown comes at a bad time for the global economy. Brazil and Russia are in decline, so too is Japan and the euro-zone is struggling to escape the doldrums. It seems a great many investors were counting on China – which, according to the Wall St Journal, ‘accounts for 15% of global output but has contributed up to half of global growth in recent years’ – to maintain some momentum.

That was always a dangerous assumption.

Steve Williams


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