Why Chinese Markets are So Volatile
One of the leading economic issues entering 2016 was the ongoing slowdown of the Chinese economy. In just the first few days of the new year, China’s economy has already experienced a great deal of volatility and this is causing concern for exporters and investors around the world. On one hand, official economic growth rates in China have fallen below 7% and are expected to remain there for the foreseeable future as growth continues to trend downwards. Moreover, other economic indicators suggest that China’s economic slowdown is continuing, with little hope for a bounce back in 2016. Meanwhile, investors in China are clearly worried about the direction of the Chinese economy, as evidenced by the extreme volatility on Chinese stock markets in recent months. What is certain is that the Chinese economy is undergoing massive changes and these changes are severely damaging business and investor confidence in the world’s most-populous country.
In recent days, these concerns about the direction of the Chinese economy have been most noticeable in the sharp falls experienced by share prices in China. For example, share prices on China’s Shanghai Composite fell by 7% in a short amount of time earlier this week, forcing share trading in China to be halted for almost an entire day. Moreover, share prices in China remained highly volatile in the following days as investor confidence levels in China continued to fall. This latest stock market volatility in China was largely the result of a new round of worrisome economic data out of that country and this suggests that investors are closely watching each and every piece of economic data that comes out of China for signs that the country’s economic slowdown is worsening. Meanwhile, China’s latest market volatility led to significant falls in share prices on markets around the world in recent days, indicating that China remains a market in which the growth forecasts of many exporters and investors are dependent upon.
As we have repeatedly indicated in recent years, this current slowdown in China is all part of the country’s transition away from being a poor country with an economy driven by capital investment and manufactured exports to a middle income country in which domestic consumer spending plays an ever larger role in driving economic growth. For the past three decades, China’s economy grew by an average of 10% per year and this growth was driven by incredibly high export and investment growth rates. However, as investment levels have reached their apparent ceiling, investment growth rates have fallen. Moreover, Chinese export growth rates have plummeted as a result of the country’s loss of export competitiveness as well as the recent weakness of many of China’s key export markets. Instead, it is Chinese consumers that have emerged as a key driver of the country’s economic growth over the past year or two, with consumer demand growth remaining in excess of 10%, well above the current overall growth rates for the Chinese economy. This is why, despite China’s current troubles, most exporters of consumer goods remain bullish on China’s future.
Given the importance of China as a key player in the global economy, it is no surprise that the economic downturn underway is causing so much concern throughout the rest of the world. As growth rates have fallen in China (and the country’s actual economic growth rate may be closer to 3% than the official rate of 7%), growth has slowed in those countries that were dependent upon China as a market for their commodity exports. Even as growth has slowed significantly in recent years, the size of the Chinese economy means that it now accounts for nearly a quarter of the world’s total economic growth, twice as much as it did when the Chinese economy peaked at growth rates of 14%. With global economic growth rates barely above 3%, and with Europe and Japan remaining sluggish while many emerging markets remain trapped in recessions, this slowdown in China is dampening expectations for a more robust recovery for the global economy. It is these dashed expectations, both in China and abroad, that are driving the current volatility on the markets in China and around the world.