China's benchmark stock index is down 30% this year, and it looks like it's not done falling yet

(Kevin Frayer / Getty Images)
  • Capital Economics expects Chinese stocks will fall by a further 7% this year.
  • The Shanghai Composite has already fallen 30% in 2018, amid fears about the economy and trade war threats.
  • Analyst Oliver Jones said yesterday’s selloff was exacerbated by data which showed a slowdown in credit growth.

The Shanghai Composite index has now lost more than 30% in 2018, and Capital Economics says it will probably fall further.

Another sharp selloff yesterday saw Chinese stocks fall to a four-year low, amid fears about the domestic economy and lingering trade threats.

It follows efforts by authorities to crack down on excessive leverage in the financial system.

More recently though, policy makers have taken steps to bolster growth through tax cuts and infrastructure spending, as well in increased liquidity.

However, economist Oliver Jones also attributed yesterday’s selloff in part to some troubling data from the People’s Bank of China on credit growth.

While the sharp moves in Chinese markets can be “hard to explain”, Jones noted that broad credit growth rose at the slowest rate since 2005.

And the doubts around China’s economy aren’t being helped by the ongoing trade war with the US, which shows no signs of de-escalating.

According to Jones, the combination has had a material negative effect on the Chinese stock market:

Capital Economics

The Shanghai Composite has “weakened alongside equities in the developed world which are particularly sensitive to both protectionism fears and demand in China, like those of car manufacturers,” Jones said.

“With this in mind, we think that the index will continue to weaken.”

The being said, the risk outlook isn’t as drastic as the one which preceded the market crash three years ago, given Chinese stocks have now more than halved from 2015 levels.

Capital Economics expects the Shanghai Composite will finish the year at around 2,300 — a discount of around 7% from its current level.

Chinese markets will reopen at 12:30pm AEST, and analysts will also be watching for China’s Q3 GDP which is scheduled for release later today.

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