Further corrections possible for Chinese shares
Another fall in the Chinese share market may be unsettling but the overall economic impact is likely to be limited.
After rebounding from its falls earlier this month, the Chinese share market fell on Monday by more than 8.5%, as measured by the Shanghai Composite Index. The most recent fall marks its largest single day descent since 2007, and appears to reflect a combination of factors that are contributing to negative sentiment among investors. Notwithstanding the volatility experienced over the past few weeks, those who have been invested in the market for the past year have still generated positive returns of approximately +70%.
Limited impact on the Chinese economy
While the significant drop in Chinese share values may be unsettling for some investors, the impact on the Chinese economy is likely to be limited because:
- Most Chinese consumers have limited exposure to China’s sharemarket with only around 10% of their assets in shares. Compare this to US investors who have around 50% of their assets in shares.
- The share market sell-off is not showing any signs of liquidity or banking stress: Corporate bond markets have remained well behaved, and interbank liquidity has, in fact, improved.
- China’s central bank cut its key interest rates again in June: This should help support economic growth over the next year. Policy reflation in China is far from over.
- China’s residential property market is stabilising: The property market recorded a second month of modest price gains in June.
What does this mean for global markets?
Our current analysis suggests that the negative sentiment we have seen in the last few days is the sort of typical volatility that is often experienced following a significant share market correction. Following the share market fall in 1987 as well as the Global Financial Crisis, share markets took time to build firm bases, and entered periods of protracted volatility before then commencing clear rising trends, and it’s likely that this is what we are now experiencing with China.
Globally, while volatility is likely to remain high, and a further correction is possible, we see little risk of a recession or bear market in global shares at this point in time. We also expect the Chinese government will support economic growth through strong monetary policy easing and other measures which, in turn, should help support Chinese shares.
About the author
Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist -
Dr Shane Oliver is Chief Economist and Head of the Investment Strategy and Economics team at AMP Capital. The team is responsible for the provision of economic and macro investment analysis, and determines the asset allocation policy which is applied across AMP Capital’s multi-asset funds.
Nader Naeimi, Head of Dynamic Asset Allocation -
With over 16 years’ experience in Australia’s financial markets, including 12 years as part of AMP Capital’s Investment Strategy and Economics team, Nader’s responsibilities include analysis of key economic and market factors influencing global markets.