Have you noticed the amount of Chinese trade that has been occurring in South Africa over the past few years? You would have to be living under a rock if you have not encountered a China mall or market in any of the major cities, and this is just drop in the ocean for South Africa’s ties to China.
China has seen massive economic growth in recent years and was a preferred destination for research and development investment. Up until recently, China has stood as a haven of economic stability at a time when the US and other developed economies were facing financial turmoil. (World Economic Forum).
The low manufacturing costs made exporting goods a driving force in growing the domestic economy.
The current situation
China’s stock market actually began to show signs that shares were overvalued. A few warning signs included (Source: John Meade- Bezinga.com):
According to Bloomberg China economist Tom Orlik, 5.8 percent of China’s new investors are illiterate and 60 percent have less than an 8th grade education. So? This means that thousands of un-educated participants were entering the marked resulting in exaggerated share prices. I.e. increased demand was due to lack of information rather than embedded value in the underlying stocks.
Reckless lending as a result of interest rate cuts by the Chinese Reserve Bank.
Increase in the number of unsold residential properties causing house prices to drop and resulting in a lagging real estate market.
Given some of the warning signs, it was just a matter of time before we saw the bubble bursting. Investors started selling stocks (shares) at an alarming rate due to share prices dropping. This brought about a frenzy in the Chinese stock market causing trading to halt in an attempt to stabilise the market.
“On the Shanghai exchange, 353 companies suspended trading, equivalent to 32 percent of all listings. A further 970 were halted in Shenzhen, or 55 percent of the total.” (Bloomberg Business)
In an attempt to regain investor confidence, the Chinese Government have made every effort to support the share price. In must be borne in mind that China does not trade in a free market (free market- prices are determined by unrestricted competition between privately owned companies), meaning that Government intervention plays a big role in Chinese markets.
Some of these attempts included easing of lending rules in order to encourage people to invest and restricting the sale of stocks for six months for those investors holding more than 5% in any stock.
What if China goes into recession?
Since the Chinese stock market crisis, we have already seen a drop in prices of commodities like copper and iron ore. Iron ore is the fifth largest export for South Africa following gold, platinum, coal and diamonds. This means less income to the South African economy due to the drop in the price of iron ore.
The weak Chinese stock market has contributed to the weakening of the Rand against the US Dollar.
Investment in emerging markets will take yet another knock as investors become more risk averse during these trying financial times.
Another worrying factor that has taken a back seat is the impact on elephant poaching. How is this relevant to the Chinese crisis? Well, the Yuan (Chinese currency) weakened against the US dollar to nearly a three month low. This means that the export of ivory becomes more attractive resulting in more elephant poaching.
Some economists are saying that the problem in China could be far worse for the global economy than the problem in Greece. Why?
Firstly, China’s economy is approximately forty times larger than Greece. Secondly, “Since China is the second largest trading partner for both Europe and the United States, it goes without saying that a healthy Chinese economy is good news for the developed world.” – CNN Money. Lastly, China is one of the biggest consumers in commodities and has a far greater impact on the global economy.
It is clear that the impact of the Chinese stock market crash has far reaching consequences. I hope I have been able to give you some insight and a glimpse into the China saga.
Natasha Bhowani Seeth- CA (SA)