3 reasons markets lost faith in China’s economy, at a glance

31 Aug 2015 | Author: | No comments yet »

3 reasons markets lost faith in China’s economy, at a glance.

For decades, Chinese economic policymakers have drawn praise for keeping their economy growing strongly through turbulence, such as the Asian financial crisis of 1997-1998 and the worldwide financial tumult of 2008.Beijing: China’s economy is growing at a “reasonable” pace and, despite growing pressure, the government can handle well the risks the country faces, Chinese Premier Li Keqiang said.BEIJING (AP) — With the Chinese stock market turmoil that incited global panic abated — at least for now — here are some questions and answers about it, as well as lessons to learn: It had more than doubled over 12 months from June 2014 as state media encouraged the public to invest even after economic growth began to slow. Li said international market instability “has increased the uncertainties around the global economic recovery, and the impact on China’s financial market and imports and exports has also deepened, with the economy facing new pressure.” He defended China’s efforts to steer through a volatile period since mid-June, when China’s stock market plunged.

By June, stocks were “trading at sky-high, rocket-crazy valuations,” said Dickie Wong, executive director of research at Kingston Financial Group in Hong Kong. State-run media talked up stocks, and individual investors responded by buying shares and igniting a 150 percent run-up in the Shanghai Composite stock index in the year through June. Prices started to fall in mid-June after regulators tightened margin financing to limit the amount brokerages could lend to customers to trade shares. Li said recent cuts in the reserve requirement ratio (RRR), interest rates, taxes and fees and measures aimed at stabilising the market were already paying off.

The central bank’s Aug. 11 devaluation of the yuan accelerated the declines by fanning concern the move would accelerate an outflow of capital from China, leaving less credit to finance stock trading. The government sought futilely to intervene, suspending trading in hundreds of companies and banning big investors from selling stakes for six months. Authorities responded with a flurry of measures to shore up prices, including barring big shareholders from selling and ordering brokerages and pension funds to buy. The intervention undermined Beijing’s pledge to give market forces a bigger say in the economy and left policymakers looking clumsy and ineffectual.

Li said China would “enact more targeted and responsive macro-regulation to offset downward economic pressure, more robust reform and innovation efforts to energise the market, and more effective delivery to secure the positive momentum for growth”. But that blizzard of announcements confused small shareholders and fueled panic. “It gave an even harder hit to the stock market and made those local investors even more fearful,” said Wong. He said China needed to encourage new forms of investment and financing by local governments and businesses, such as local debt swaps and corporate bonds. When the drops worsened and Shanghai index tumbled 8.5 percent on Monday, that spooked international investors who were already worried about the possibility of higher U.S. interest rates, prompting a global sell-off. Most people outside China can’t even invest in the country’s stock market, but as worries persist about tenuous global growth, “anything that suggests that the prospects look more dim is going to send equity investors running for cover,” said Lori Heinel, chief portfolio strategist at State Street Global Advisors.

Since the devaluation, China has intervened to keep the yuan from falling too fast, confusing markets and renewing doubts about Beijing’s commitment to market forces.

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