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Debt, trade and growth concerns in the world’s second largest economy were a catalyst for market sell-offs in 2015 and 2016
Thursday 05 Jul 2018 Author: Tom Sieber

The tension on trade provoked by a more belligerent and protectionist administration in the White House is proving to be a dominant theme for investors in early 2018.

While this has led to some volatility in Western markets the impact has been more pronounced in Asia.

The Hang Seng index in Hong Kong is at a 10-month low, the Shanghai Composite Index is bumping around close to its lowest levels in more than two years and the Chinese yuan has been on a downward spiral since mid-June.

The markets are getting particularly jittery ahead of a 6 July deadline when the US is set to impose tariffs on $34bn worth of Chinese goods, with Beijing poised to respond in kind.

Concurrently fears are being raised about rising debt levels in China and the economy’s transition from export-driven growth to being more centred on domestic demand.


This matters to investors around the world. Two of the biggest global stock market sell-offs in the last decade have resulted from creeping concern about China. It happened first in August 2015 and then in early 2016 as the value of shares and other riskier assets like commodities crashed.

The chart showing the FTSE 100 against the exchange rate between the yuan and US dollar shows how the tumbling Chinese currency was a warning sign for market volatility in late summer 2015 and again less than six months later.

Economic research consultancy Capital Economics does not think there is cause for genuine alarm at the moment. ‘The current weakness in China’s financial markets has more to do with worries about China’s economy than the trade spat with the US.

‘Barring significant negative surprises, however, we do not think there will be the same ramifications for the rest of the world as there were a few years ago.’

However, given past experience it would be sensible for investors to keep a close eye on this issue.

In particular, it is worth monitoring the mining sector for early signs of problems given how this industry is highly dependent on commodities demand from China.

‘We continue to expect a slowdown in demand in the coming months in response to more than 12 months of negative broad credit growth, but at this stage the evidence looks fairly thin on the ground,’ says Liberum mining analyst Richard Knights.

‘Consumer demand indicators such as appliances and vehicles are weak but housing construction, the most significant driver of Chinese commodity demand, has accelerated since the beginning of the year. At the same time, credit growth has missed market expectations significantly in three of the past six months as the shadow banking crack down constrains lending.’ (TS)


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