Stock slide's long-term effect will be limited

Volatility in China's young markets doesn't negate the nation's solid fundamentals and is not expected to sink world markets, experts say

The impact of China's stock market slump on European and US capital markets and economy is limited in the long term, industry insiders say.

"China has a relatively new market that is in the process of rapidly opening up, and it is not unusual to have volatility in the system," Mark Boleat, policy chairman of the City of London, says.

"It will be key for the Chinese authorities to address this, look to calm the situation, and crucially help develop an institutional investment base in line with China's pledge to give a decisive role to markets."

His words came as China's stock market has been under pressure since "Black Monday", Aug 24. The Shanghai Composite Index had fallen about 16 percent by midweek.

"We are still observing and working through the short-term effects on the European markets. The size of China's market moves, often over 5 percent, appears to be bleeding into European equity markets - prompting extreme movements," says Ben Kumar, investment manager at Seven Investment Management, a London-based financial company founded in 2002.

As for the longer-term impact, Kumar adds: "Capital markets are unlikely to be affected. We are still seeing plenty of (mergers and acquisitions) activity and debt issuance, the European corporate bond market has been relatively stable over the past few trading days."

European stock markets lost ground on Aug 26 after rallying the day before. London's FTSE 100 closed down by 1.7 percent, with markets in Paris and Frankfurt finishing down by 1.4 percent and 1.3 percent respectively.

On Aug 25, London's FTSE 100 jumped 3 percent, while Germany's Dax gained 5 percent and the Paris Cac rose by 4.1 percent. Other European markets, including Lisbon, Madrid, Moscow and Milan, all closed sharply higher.

Russ Koesterich, global chief investment strategist from BlackRock, the world's largest fund manager, notes: "The selling last week and earlier this week in European equities was very indiscriminate. That selling created opportunities in select European equities.

"We are now seeing investors looking at individual names that represent value. We see value in segments of the European equity market that are geared to domestic growth. Examples would include home builders and some of the domestic-facing banks."

Experts expected more market volatility before the US Federal Reserve meets in September to set interest rates.

Global stock markets continued down a volatile path on Aug 26 as US equities soared but Chinese shares fell modestly. Worries about the economic slowdown in China, the prospect of an interest rate increase in the United States and slumping commodity prices have combined to reinforce fears that the world economy might be on weaker footing than previously thought.

All the turmoil has caused some speculation that the Fed, perceived to be on track to raise US interest rates soon, may delay the move.

William Dudley, the president of the Federal Reserve Bank of New York, said on Aug 26 that international developments "do have relevance" for the US economic outlook, and that a rate increase at the Fed's September meeting is "less compelling". However, Dudley left the door open for a move at the US central bank's meeting in December.

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, believes that the Fed will stay on the sidelines next month.

"The US will be out of step with the rest of the world, especially emerging markets, including China, if it 'pulls the trigger' in September and prompts another round of currency devaluation," he writes in an e-mail. "US hawks are calling for a 0.25-percent short-term rate, but I don't think the Fed will oblige."

Jack Liu, senior vice-president of Chardan Capital Markets in New York, also believes the Fed may hold off. "(The) Federal Reserve has demonstrated in the last two years it is weighing a lot of global factors and taking a very prudent position on raising interest rates in the US.

"Given the Chinese market is collapsing with no signs of stabilizing in the near term, I will be surprised if the US will rush on any decisions to change its current course on interest rates," he writes in an e-mail.

Noting that the People's Bank of China on Aug 25 trimmed interest rates for the fifth time in nine months, Sung Won Sohn, a professor of economics at California State University Channel Islands in Camarillo, California, urged the Fed to do its part by implying that the liftoff won't occur this year." There is no need to rock the boat in turbulent waters, he says.

The Shanghai Composite lost 1.27 percent to 2,927.29 on Aug 26. In the US, the Dow Jones Industrial Average rose 619.07 to 16,285.51. The Nasdaq Composite also moved sharply higher, gaining 191.05 to settle at 4,697.54.

"China's stock market turbulence doesn't have much of a direct effect on the US real economy, but obviously it affects US financial markets," Hufbauer says. "I don't think the US has entered a bear market, but if it has - thanks to events in China - that will put downward pressure on the US real economy."

According to Liu, the main culprit of the current market turbulence in China is the hyper leverage of the main economy. "The problem is not new, but clearly it is becoming a lot more pronounced as the market is collapsing.

"Because this is more of a domestic problem for China, I don't think the US economic recovery is going to be hit hard significantly," he says. "The US stock market has had some good runs in the last five to six years. It is long overdue for some correction itself."

China's market decline is likely to curtail US investor interest in shares of Chinese companies. "US investors have been losing their confidence in the Chinese economy for a while, and clearly the current market turmoil is only making it worse," Liu says.

Hufbauer describes US investor interest in Chinese equities at "approximately zero" right now.

"Until we get US Federal Reserve meets in September out of the way, I think markets will continue to be choppy," Michael Hewson, chief market analyst at CMC Markets, told the BBC.

When it comes to the economic impact of the stock market fall, Kumar says that it should be similarly limited. While many European countries trade with China, they do not do so on the basis of share price.

Kumar notes that the real worry for European investors and policymakers is if the stock market fall is symptomatic of a real deterioration in Chinese growth. "If that were the case, the above statements might be very different. However, we do not believe that the Chinese economy is failing - it is adjusting, perhaps somewhat jerkily, to its new position in the world. That is a good thing in the long term," he adds.

China's economic slowdown is likely to grind to a halt by the end of this year or the first half of 2016, with GDP growth staying around 7 percent, said Li Daokui, director of Tsinghua University's Center for China in the World Economy, speaking in a panel discussion on Aug 27.

"This round of stock sell-offs is more sentimental, triggered by the concern for the further slowdown of the economy," says Li.

The Shanghai Composite Index gained 5.34 percent on Aug 27, the first rally since the "Black Monday".

Martin Sorrell, head of WPP, the world's biggest advertising company, expressed his confidence in the Chinese economy.

"I remain a raging bull in regard to China," he says, speaking to BBC Radio 4 Today's program on Aug 26, adding that the world should not forget how far the Chinese economy haS come since 1985.

He says the Chinese stock market had become overblown and was undergoing a correction, but long-term secular growth in China was here to stay.

"Hopefully the Chinese market is becoming more international - both in terms of function and participation," Kumar says. "The two go hand in hand - foreign investors will only begin to put real money to work if they can understand the market dynamics."

He notes that all companies want a piece of the Chinese economy -importers and exporters. "Our view is that Chinese growth is changing, from a low-income nation to a medium-income nation. That gives opportunities to supply the growing consumer base with foreign imports."

Koesterich says: "We believe that China will continue to move toward further financial liberalization. We also believe that there is further scope for policy to support China's economy.

City of London's Boleat notes: "City firms are still seeking to do more business with China, looking for investment and exporting opportunities, and the relationship between the City of London and China continues to grow stronger."

Contact the writers through huyuanyuan@chinadaily.com.cn