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The Chinese stock meltdown and NZ

July 9, 2015 6:29 pm

The dramatic rise and fall of the Chinese stock market does not augur well in the short term for New Zealand exports to the world’s second largest economy according to local economists.

New Zealanders woke today to news of a downward spiral in the Chinese stock market. The Shanghai Composite index fell 5.9 percent, taking the value of shares to 32 percent below their peak in June.

But lying beneath that headline number the story is about a stock market which has seen a large correction over a short period of time, and the dramatic plummet, comes off a dramatic high, and in reality the stock market is back to similar levels as to where it was in March this year.

The drop follows moves by Chinese officials to calm the volatility in the market, including stopping investors with more than a 5 percent stake in stocks selling their shares in the next six months.

Economists said that the correction should be seen as being distinct from China’s wider economy.

A BNZ senior economist, Craig Ebert, said the fall was big, but it was important to understand what was behind it.

“The chinese equity market has been on a ballistic move really since the start of the year. Between around March and mid-June the Chinese stock market essentially doubled in value and part of that was because Chinese officials were cheer-leading the market as part of its reform packages.”

“I think it just got so much a head of steam it [Chinese officials] just had to step in and say enough is enough and put in some policy measures to nip it in the bud.”

He said the fact that the Chinese stock market essentially doubled in the first few months of this year, while the Chinese economy was demonstrably slowing down “tells you that there’s clearly some disengagement of the equity market moves to what’s going on in the general economy.”

A Westpac senior economist, Michael Gordon, said what has happened with the Chinese sharemarket was not a reflection of the country’s underlying economy.

He said there have been dramatic movements in the market in both directions over the last year, and there has been an explosion in what is called margin borrowing, effectively buying shares using debt.

“That caused a run up in the sharemarket of around about 150 percent in the space of a year, but then as the market started to turn what happened is that these loans that were used to buy shares they started to be called in, that forced people to sell shares, which pushed the prices down, which forced more loans to be called in and so on.”

He said this pattern has meant there was a substantial spiral up and a substantial spiral downwards in the market.

Mr Gordon said the borrowing to buy shares had been heavily concentrated towards mum and dad or retail investors in the last year, the level of which far exceeds what goes on in the US market for example.