Main­land China’s slow­ing econ­omy: What is wrong and what can be done?

The China Post - - WORLD BUSINESS -

Asian stocks nose­dived on Mon­day, led by sharp falls in Shang­hai as con­cerns mount over the health of main­land China’s econ­omy — the world’s sec­ond largest.

Although China, a ma­jor en­gine of global growth, has been slow­ing for some time, fi­nan­cial mar­kets have nev­er­the­less tum­bled over fears its eco­nomic growth will de­cel­er­ate faster than ex­pected.

Here are a se­ries of an­swers to key ques­tions on the Chi­nese stock mar­ket and the wider econ­omy:

What Has China Done to Try to

Stop Shares Fall­ing?

Main­land China rolled out a range of mea­sures last month af­ter Shang­hai stocks slumped more than 30 per­cent from their mid-June peak, but while they had a short­term im­pact in buoy­ing prices, their im­pact has since evap­o­rated.

Shang­hai’s bench­mark in­dex rose about 17 per­cent in the two weeks fol­low­ing the mea­sures’ an­nounce­ment, but have lost all of those gains, and then some, to fall nearly 21 per­cent since.

In the early July moves, the gov­ern­ment in­ter­vened with a res­cue pack­age that in­cluded fund­ing the state-backed China Se­cu­ri­ties Fi­nance Corp. (CSF) to buy stocks on be­half of the gov­ern­ment.

Other mea­sures in­clude bar­ring “big” in­vestors from selling their stakes and crack­ing down on short­selling — when in­vestors bet prices will go lower.

At the week­end author­i­ties said the state pen­sion fund would be al­lowed to in­vest 30 per­cent of its to­tal as­sets — which ac­cord­ing to the of­fi­cial Xin­hua News Agency amount to 3.5 tril­lion yuan (US$550 bil­lion) — in shares.

In an ef­fort to re­as­sure in­vestors that in­ter­ven­tion would con­tinue, the mar­ket reg­u­la­tor said the CSF would keep sta­bi­liz­ing the stock mar­ket for a num­ber of years.

Bei­jing has also cut in­ter­est rates and is­sued a shock de­val­u­a­tion of its cur­rency of nearly 2 per­cent on Aug. 11, caus­ing the yuan to tum­ble al­most 5 per­cent over that week, which should give ex­porters a boost.

Where Next for China’s Stock

Mar­ket and Cur­rency?

Mon­day’s falls took the Shang­hai stock mar­ket be­low its level on July 8, when Bei­jing stepped in and prompted a rally.

It is also be­low its clos­ing level on Dec. 31 last year, mean­ing it has wiped out all its 2015 gains.

De­spite the gov­ern­ment’s “na­tional team” hav­ing made a ma­jor ef­fort ef­fort to sup­port the mar­ket, an­a­lysts say shares are likely to go still lower as the plunge in global bourses is blow­ing back on China in what is ef­fec­tively a vi­cious cir­cle.

The yuan is widely ex­pected to weaken fur­ther against the U.S. dol­lar, although the cen­tral bank is ex­pected to in­ter­vene to pre­vent steep slides.

Ja­panese bank No­mura ex­pects the cur­rency, cur­rently around 6.4 yuan to the U.S. dol­lar, to de­pre­ci­ate fur­ther to 6.6 by the end of the year.

Why Are Fi­nan­cial Mar­kets So Gloomy About the Chi­nese

Econ­omy?

China’s econ­omy ex­panded 7.4 per­cent last year, its weak­est since 1990, and growth has slowed fur­ther this year, mea­sur­ing 7.0 per­cent in each of the first two quar­ters.

It is a far faster growth rate than most other ma­jor coun­tries, but the yuan move raised sus­pi­cions that the state of the econ­omy is worse than of­fi­cials have re­vealed.

China’s sec­ond quar­ter gross do­mes­tic prod­uct (GDP) fig­ure ex­actly met the gov­ern­ment’s full-year tar­get of “around” seven per­cent, lead­ing some an­a­lysts to ques­tion the an­nounce­ment, which came af­ter sev­eral weak in­di­ca­tors. Main­land China has long faced ac­cu­sa­tions that the gov­ern­ment mas­sages eco­nomic fig­ures dur­ing times of slow­down.

Why Is Slow­ing Growth Such a

Prob­lem Do­mes­ti­cally?

Ex­perts say main­land China’s rul­ing Chi­nese Com­mu­nist Party needs to de­liver im­proved liv­ing stan­dards, lift­ing more peo­ple out of poverty and sat­is­fy­ing the grow­ing mid­dle class, in ex­change for ac­cep­tance of its rule. The main­land author­i­ties also need to main­tain a min­i­mum level of eco­nomic growth, which some an­a­lysts put at seven per­cent, in or­der to cre­ate jobs for mil­lions of peo­ple and pre­vent so­cial un­rest.

Why Is Slow­ing Growth a Prob­lem In­ter­na­tion­ally?

With Europe’s econ­omy weak and the U.S. pre­par­ing to raise in­ter­est rates, the world has looked to China’s thirst for raw ma­te­ri­als to keep fi­nances hum­ming. With more than 1.3 bil­lion po­ten­tial con­sumers, the coun­try is also a big mar­ket for man­u­fac­tured goods such as cars. Any weak­ness in de­mand could be keenly felt by pro­duc­ers.

Is the Panic Jus­ti­fied?

An­a­lysts are mixed on the ques­tion. The latest scare came last Fri­day when a sur­vey in­di­cated that man­u­fac­tur­ing ac­tiv­ity was at its low­est for more than seven years.

“The multi-year low in the PMI (pur­chas­ing man­agers’ in­dex) con­firms that the econ­omy is still not on a solid foot­ing and (we) look for a flat growth pro­file in H2, with con­tin­ued down­side risks,” Bar­clays Bank said in a re­search note.

But oth­ers said China can still de­ploy fur­ther in­ter­est rate cuts and spend­ing mea­sures.

“We con­tinue to be­lieve that sen­ti­ment is cur­rently overly down­beat and that pol­icy sup­port will limit the down­side risk to eco­nomic ac­tiv­ity over the course of the next cou­ple of quar­ters,” Cap­i­tal Eco­nom­ics said.

Another risk is that mar­ket in­ter­ven­tions could de­rail eco­nomic re­forms and cause the gov­ern­ment to fall back on pump-prim­ing in­stead of pur­su­ing its long-touted aim of shift­ing to do­mes­tic con­sump­tion as the driver of more sus­tain­able growth.

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