IQ-Magazine-Issue-14

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IQ finance Will China’s sneeze develop into the flu? Steve Elsom, Area Director for Lloyds Bank delves deeper issue 13 | page 14
IQ finance The world’s second largest economy has sneezed.....not once or twice, but enough times for the worlds economies to sit up, and potentially take fright. The Shanghai Composite index (the Chinese stock exchange) has lost around 30% in value in the previous two months, but more worryingly the Chinese have seen a fall in exports, and weaker than expected industrial production, retail sales and investment figures. The China manufacturing sector survey, which measures order volumes, resourcing, stock order levels and backlogs, fell to 47.1 this month - it’s lowest level for six years. Forecasts for growth this year have been cut to less than 7%... down from the double digit growth that the nation has enjoyed over the past several years and the Central Bank has revalued the currency, cut interest rates and relaxed some of the internal bank reserve requirements. The importance of China as a global trade superpower is highlighted by the scale of its imports...14% of global oil exports are to China, 6% of cars, 57% of iron ore, 31% of copper ore and 58% of soya beans. Without China’s ‘business’ - economies around the globe will undoubtedly suffer. But will this sneeze develop into the flu? The Chinese Composite index had more than doubled in value in the 12 months to June 2015 and only 2% of shares are owned by foreigners. Indeed, there is a huge rump of small inexperienced private investors who make up the ‘stock registers’, who have rode on an increasing wave of debt over the past few years, but whose inexperience leads to more volatility. Intervention by the Central Bank has seen many of the global jitters abate and stock markets around the world have seen a ‘bounce’....and in my view this has been a ‘correction’ rather than a ‘crash’ and if it takes it’s medicine, China can fight off the flu. But there will be fears that rather like the Greek situation, the ‘can has merely been kicked down the road’ and the Central Bank of China will need to show the world that it can stabilise the currency fluctuations at the same time as keeping the economy motoring along. It has undoubted strength in terms of reserves (something that Greece doesn’t) but it’ll be keen to win back investor confidence and repair market sentiment, ultimately leading to future growth in value being ‘built not borrowed’. More Information Lloyds Bank, Endeavour House, Chivers Way, Vision Park, Histon, Cambridge, CB24 9ZR steve.elsom@lloydsbanking.com @steveelsom1 issue 14 | page 15
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