Strap yourself in, this could go on for a while.
China’s stock market rout kicked up a gear on Monday, with the Shanghai Composite collapsing 8.5% after a dire performance last week.
Goldman Sachs is now warning clients that it thinks the sell-off will go on for at least another 6 weeks and could last for up to 2 months.
In a note sent to clients on Monday, Asia Pacific analyst Timothy Moe & his team say only positive economic data can put a floor under China’s tumbling markets now. And the first signs of anything of the sort are at least a month and a half away.
The government has until now being trying to prop up the markets with policy announcements and state cash, but Goldman doesn’t see this as a good enough solution.
Here’s Moe (emphasis ours):
The extent to which markets have fallen naturally stirs contrarian instincts regarding when to look for some sort of rebound. It will probably take some tangible evidence- stable/better high frequency activity data- for this to occur, rather than simply policy announcements.
This is still 6 weeks to 2 months away for China, as stabilisation appears unlikely before early October, given continued disappointments in external demand, the policy-induced “uncertainty shock” from equity market and currency moves, temporary production shutdowns in 7 provinces in late Aug/early Sept for major national events, and slower fiscal/infrastructure ramp-up than expected.
However, if policymakers react as they have in the past, some modest sequential growth improvement in 4Q still seems likely.
If Goldman’s prediction is true, it will have a disastrous effect on the global economy. Markets around the world are tumbling today, amid fears that slowing Chinese growth could have a knock-on demand for other nations. If Chinese stocks keep tanking, global stocks likely will too.