What has happened?
Booming growth in China played a key role insulating Australia’s economy from the worst of the global financial crisis. Several years later and times have changed – Australia’s largest trading partner is now suffering its own crisis.
Not only has China’s economy slowed significantly but its share market has plummeted in recent weeks. From peak to trough, the Shanghai Composite Index fell by more than 32 per cent between June 12 and July 8. It ended a bull market which recently peaked when the share market more than doubled in just over a year.
The sell-off quickly prompted the People’s Bank of China (PBC) to launch several measures aimed at restoring confidence although it remains to be seen whether they will have any long-term impact.
The key question facing investors is whether the downturn is simply a correction to an overheated market or a more significant sign that China’s economy is quickly deteriorating.
While China’s official growth has slowed to 7 per cent in recent years as it transitions from an investment-led economy to one powered by domestic consumption, other indicators suggest real growth is even slower. If the share market drop harms business and consumer confidence in China, it could worsen the current economic slowdown.
Slower growth in China would also have significant implications for the Australian economy, share market and dollar because it would continue to drag down commodity prices. However, this is being moderated by the lower Australian dollar which is helping exports while historic low interest rates have helped power the residential property market.
Behind China’s share market slowdown:
- The Shanghai Composite Index’s recent correction marks its largest decline since 1992.
- The share market fall prompted the PBC to ban short-selling, relax margin lending rules, cut trading fees and slow the pace of IPOs. It has also provided short-term funding to China Securities Finance Co which provides margin loan financing to brokers.
- China is Australia’s largest trading partner and its slowing economy will have negative implications for Australia, which still relies heavily on commodity exports.
How will this affect my investment portfolio?
Emerging market shares typically comprise a very small allocation in most portfolios because of the extra risk which accompanies potentially higher returns.
Nonetheless, we reduced our portfolio allocations to China, as well as other emerging markets, some time ago in expectation of a slowdown.
The valuation of the broad market is now approaching more reasonable levels although smaller company and technology-focused shares remain overvalued and there may be further declines.
What should I do?
We are closely reviewing the impact of China’s share market downturn and any broader potential impact the country’s economic slowdown may have. We have already reduced exposure to emerging markets and our portfolios are well diversified to withstand volatile market conditions. It is also important to maintain a long-term view on particularly volatile investments such as emerging market shares. While the recent correction is significant, investors over the past year have still enjoyed significant returns.
We believe that Chinese policy makers will successfully stabilize economic growth at a reasonably strong level, although they may be required to take more action.
If you are concerned about how the Chinese share market crisis may affect your portfolio and wish to speak with one of our advisers, contact our office at firstname.lastname@example.org