Friday 28 July 2017

China share plunge: 5 things you need to know

An investor takes a nap on a chair in front of an electronic board showing stock information at a brokerage house in Nantong, in China’s Jiangsu province
An investor takes a nap on a chair in front of an electronic board showing stock information at a brokerage house in Nantong, in China’s Jiangsu province

Gavin McLoughlin and Peter Flanagan

Here are 5 things you need to know about the economic difficulties in China.

1 - China's stock index had been rising steadily this year, to the extent that ordinary people had been borrowing money to buy shares in the hope of making a return. But the domestic Chinese economy has been slowing for a while now and despite the Government's best efforts to prop up the stock market, the shares are following the economy downward, costing investors a lot of money.

2 - China is one of the world's biggest consumers of oil and commodities like copper. A slowing economy there means the demand for those goods is lower and prices fall, hitting companies around the world that deal in those products. The falling Chinese stock market will exacerbate the slow in demand as people lose money on shares, though the Chinese economy is not as exposed to its stock market as, say, the US was to Wall Street in 2007/8.

3 - Global investors fear that the decline is going to continue for a while. Share prices are falling because investors are selling in the fear that if they don't, the prices will fall further and they'll lose more money as the slowing Chinese economy hits US and European companies.

4 - What can be done? Well - most central banks don't really any policy tools left. One option would be to cut interest rates to encourage people to borrow and spend money, but in most Western countries interest rates have been at or around zero for a while. The other option is what's known as quantitative easing (QE) - essentially printing money to get more cash into the economy - but the US, the UK and Europe have already embarked on massive QE programmes and pushing it too far is dangerous.

5 - Nobody knows yet where this is going to end. It may be that this is just a 'correction' to share prices that had got too high. Or it may be that this is the start of another downturn - exacerbated by the fact that there are no traditional Central Bank tools left. Much will depend on the Chinese Government.

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