Why China slowdown is scaring markets

Why China slowdown is scaring markets
PHOTO: AFP

SHANGHAI - Here are some answers to key questions on the faltering Chinese stock market and the wider economy:

What has China done to try to stop shares from falling?

The authorities rolled out measures designed to restore confidence after China's stock market slumped dramatically over three weeks since mid-June, but they had only a short-term impact.

In the latest measure, the authorities at the weekend said the state pension fund would be allowed to invest 30 per cent of its total assets - a trove the state media says amounts to US$550 billion (S$777 billion) - in shares.

Beijing has also cut interest rates and issued a shock devaluation of its currency of nearly 2 per cent on Aug 11, causing the yuan to tumble almost 5 per cent over that week.

The move will give exporters a boost, but also raised fears that China is doing worse than had been thought.

What's next for China's stock market and currency?

Yesterday's falls take the Shanghai stock market below its level on July 8, when Beijing stepped in.

It is also below its closing level on Dec 31 last year, meaning it has wiped out all its gains this year.

Analysts say shares are likely to go lower still, as the plunge in global bourses is blowing back on China.

The yuan is widely expected to weaken further against the US dollar.

Why are financial markets so gloomy about the Chinese economy?

China's economy expanded 7.4 per cent last year, its weakest since 1990, and growth has slowed further this year.

Beijing is trying to pull off a tricky rebalancing of the economy to make growth more consumer-driven and sustainable, but also making sure it does not slow so much that employment growth is severely affected.

Why is slowing growth a problem internationally?

With Europe's economy weak and the United States preparing to raise interest rates, the world has looked to China's to keep finances humming. The realisation that Beijing can no longer be relied on has caused panic.

Is the panic justified?

Analysts are mixed on the question.

The latest scare came on Friday, when a survey indicated that manufacturing activity was at its lowest in more than six years.

"The multi-year low in the PMI (purchasing managers' index) confirms that the economy is still not on a solid footing and (we) look for a flat growth profile in H2 (second half of fiscal year), with continued downside risks," Barclays Bank said in a research note.

But others said China can still deploy further interest rate cuts and spending measures.

"We continue to believe that sentiment is overly downbeat and that policy support will limit the downside risk to economic activity over the next couple of quarters," Capital Economics said.

Another risk is that market interventions could derail economic reforms and cause the government to fall back on pump-priming, instead of pursuing its long-touted aim of shifting to domestic consumption as the driver of more sustainable growth.

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