IQ-Magazine-Issue-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