The Chinese stock market peaked in June, ever since share prices have suffered a monstrous reversal. With p/e ratios for glamour stocks reaching well into triple digits, this isn’t a massive shock. What has been a surprise is the ham-fisted measures employed by the authorities to try to arrest the declines. Measures such as bans on short selling and the establishment of support funds were soon superseded by increasingly farcical actions such as the arrest of 200 individuals for heinous crimes such as scaremongering blogging and the writing of emotive newspaper articles.
Global markets only began to take fright following the bungled attempt to devalue the renminbi on 11 August. This resulted in a ‘mighty’ 3% fall in the yuan. The authorities have been splurging FX reserves in support since. Nevertheless the seed was sown, and the Chinese panic spread to the developed markets. The FTSE All Share suffered a 13% drawdown. Stock prices have since recovered part of the losses, though the impact of the VIX index leaping from 15 to 53 within 3 days has left a scar.
The question for us is whether this presages a slowdown in global growth. At the margin it may, but it is hard to envisage the emerging markets causing developed economies to stall. The Chinese economy maybe slowing, but even 5% growth this year, the low end of reasonable estimates, would add more to world output than the 14% expansion China posted in 2007. What is more certain is that the affair will slow the opening of Chinese capital markets and it has sullied the Chinese authorities reputation for economic management.
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