China’s slowing economy: What’s wrong?

SHANGHAI, China (AFP) — Asian stocks nosedived on Monday, led by sharp falls in Shanghai as concerns mount over the health of 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?

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 short-term 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 ($550 billion) – in shares.

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

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

Where next for China’s stock market and currency?

Monday’s falls take 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 December 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 US 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 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” 7 percent, leading some analysts to question the announcement, which came after several weak indicators. China has long faced accusations that the government massages economic figures during times of slowdown.