Trading was stopped in Chinese shares this morning, after another 7 per cent fall in prices triggered an automatic stop in trading. This has knocked on to nasty early falls in European markets. Here are the five key things you need to know.
1. Why is it happening ? The latest upheaval followed the decision by the Chinese authorities on Wednesday to allow their currency, the renminbi, to devalue further against the US dollar, adding to fears about the outlook for growth. As brokers Cantor Fitzgerald wrote in a note to investors this morning, the Chinese economic is based on manufacturing and official data last weekend showed manufacturing had slowed for the fifth successive month, for the first time since 2009. "The reliability of official data in China is often called into question, leading investors to speculate that the economy could actually be much weaker than the released data would suggest," Cantor said. The decision to allow the currency to weaken – which would help Chinese exporters – has added to these growth concerns. This is the fundamental reason for the fall in Chinese equity prices in recent days.
2. What does it mean for the rest of the world? China is the world's second largest economy and a key driver of world growth in recent years. So growth fears in China have implications for the international outlook in a way that would not have been the case a decade or more ago, particularly when growth is weak elsewhere. China has been a key growth market for many exporters in recent years - for example the German stockmarket has been particularly vulnerable as big machinery and engineering exporters there have made hay from the Chinese manufacturing boom. Also, many so-called emerging markets in the Asia region - the likes of Malaysia, Vietnam and South Korea – have China as a key market and their own currencies have come under pressure due to the fall in the renminbi.
3.But it can't all be explained by China, can it? This is correct. The familiar problems much discussed last year also remain. Growth is weak in the euro zone and there are fears that US growth could be weakening a bit. The US central bank is trying to edge up interest rates, which has added to nervousness. Meanwhile it remains unclear whether the ECB can succeed in reviving inflation in Europe. With equity markets already at strong valuations - particularly the US markets – the fear is that the expected profits on which these prices are based will not emerge. The next key focus here will be US monthly jobs figures for December, out on Friday.
4. And what about oil prices? The drop in oil prices has been extraordinary, with Brent crude down to $33 today - a drop of well over 10 per cent in the last week alone . Oil prices have lost an astonishing 70 per cent since the middle of 2014. Fears about growth in China and elsewhere have been a key factor, as slower growth means lower demand for oil. The other issue is the huge global stocks of oil and oil products, particularly in the US, fuelled in part by new production methods. Falling oil prices help importers such as Ireland, but also threaten to underpin deflation in the euro zone, making it harder for the ECB to return inflation to its 2 per cent target. The fall in the price of oil and other commodities makes it harder for big exporters of these products.
5. What happens next? Opinion is divided among those who think the upheaval will gradually pass and others who see a fundamental turning point for markets. George Soros, the legendary investor, is reported today forecasting a markets crisis along the lines of 2008, spurred by events in China. Forecasting is not helped by uncertainty about what is really happening in China. At very least, market indicators are predicting a period of volatility. Hold on to your hats !
