- Sharp declines in Chinese stocks, along with a weakening currency have sparked comparisons to the 2015 China selloff which spread to global markets.
- But Oliver Jones from Capital Economics says risks of contagion remain low, despite the ongoing threat of a trade war.
- Jones expects China’s economy to slow in the second half of the year, but isn’t forecasting a hard landing.
Chinese stocks are coming off their worst month since January 2016, and so far they haven’t been faring much better in July.
China’s currency has also been under pressure, prompting comparisons with the 2015 selloff in Chinese stocks which spread to global markets.
But despite the ongoing threat of a trade war, stock markets in major developed economies have so far been relatively immune to the falls in China.
And Oliver Jones from Capital Economics said that for now, fears of market contagion remain low.
“The key difference between now and 2015-16, though, is that investors no longer appear worried about a “hard landing” in China’s economy that could have severe consequences for the global economy,” Jones said.
He highlighted the chart below which shows Google searches for “China economy crash” spiked amid market fears in 2015/16, but remain relatively flat at the present time.
So the evidence suggests that investors think China’s current bout of market weakness will be contained, “even if they are concerned that growth will be a bit slower than they had previously thought after the escalation of US protectionism,” Jones said.
Markets also appear relatively indifferent to further complications stemming from China’s ongoing deleveraging campaign, although a leaked report last week warned of a potential “financial panic” in the coming months.
Jones cited the recent contraction in Chinese PMI data as evidence that China’s economy growth will continue to ease in the months ahead.
“But we are forecasting a slowdown, rather than a slump, over the rest of this year,” Jones said.
“So even if we see some more weakness in China’s currency and equity markets in the near term, any resulting hit to the US stock market could still be limited.”
Chinese stocks initially fell by more than 1% yesterday before rallying back to even in afternoon trade.
Those gains followed a statement issued by the People’s Bank of China announcing it would take measures to support a stable yuan.
Given the volatility in recent weeks, all eyes will again turn to Shanghai when Chinese markets open at 11:30am AEST.
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