ASX set for a shock as China gets the sniffles

Nic Crowther
Mon 24 Aug

Stand by, people, it looks as though the Australian Stock Exchange is in for a hammering this morning, largely off the back of US jitters around the Chinese economy.

So what is happening with our giant Asian neighbour? What are the conditions that are producing such bearish predictions for a country so accustomed to sustained and extraordinary growth?

Here are the five top triggers to what is happening in China in 2015.


1. The stock market

In China, the stock market is not the economy. If you were to track China’s GDP growth alongside the movements of the Shanghai Composite Index (SCOMP), you would see little correlation.

The SCOMP is highly speculative and (until very recently) far from the government-controlled levers of broader Chinese investment. As a result, it’s valued at twice its value 18 months ago, but 11% less than it was worth last week. That’s simply too speculative to manage.



2.  The housing bubble

This has been the sleeping giant in China for year now. The housing boom in China was largely a result of increased personal wealth combined with a fear that opportunities to own new homes might disappear. As a result plenty of housing, regardless of whether it was needed or not, was snapped up at increasingly extreme prices to take advantage rapidly increasing returns.

The problem is that is clearly a false economy. Even in Shanghai, the economic powerhouse of Mainland China, Apartments that are being purchased for RMB 3,000,000 are seeing monthly rental returns of only around RMB 1000 – or less than half that you might realise in the Australian market.

Put into the mix the endless empty tower blocks that can be seen all the way to the horizon, and there is a looming correction that is sure to cause a spectacular amount of pain to the global economy.


3. GDP figures might be rubbery

For the last three or four years we’ve observed the Chinese Government reporting growth from around 10% to the current rate of 7%. Okay, all seems well, and looks good for global growth.

However, the manufacturing figures that are released on independent quarterly analysis doesn’t really match up with what is being reported through official channels. There is now deep suspicion that Chinese growth is well below what we are being told. This is not good for global confidence, because…



4. Globally, there is nothing left in the bank

Carrying almost no debt, China stimulated its internal economy to sail through the Global Financial Crisis in the years following 2008. Most of this spending was done by the provinces, and as such have all but exhausted their cash reserves. The major concern is that should another global economic crisis hit (and the current winds suggest it might) there is no one left to provide stimulus.

The EU is still propping up Greece, the US has only just stopped printing cash, and China, through a mixture of debt, a property bubble and quantitative easing to reduce the impact of the plummeting SCOMP, has nothing left to offer.


5.  The People’s Bank of China

The PBC may be the only thing that holds all of this together. If the current Chinese economy was to be managed by the European Central bank of the Federal Reserve, the curtains would come down almost immediately. However, with the Chinese government running through all manner of industry and managing the countries debt, it’s reasonable to assume that the PCB has a tight hold on the reigns, and is moving very carefully to protect its financial position.


Hold on tight, folks. The market opens at 10.00am. There is some speculation that the ASX won’t cop the same hammering as Wall Street did last week, especially given the Australian Market has already come off around 13% since its highs in April, however the next feew hours will be telling.