Whilst the Chinese economy is the world’s second largest, it must be remembered that the government of China is still the communist party and that free market capitalism does not sit easily with communist philosophy. Nonetheless, the Chinese have embraced global trade and the (partial) private ownership of businesses as they seek a greater role in world affairs. They have also encouraged individuals to become investors and the major index in Shanghai has seen phenomenal growth in recent years. It rose from a level of 100 pints in December 1990 to peak at 6092 in October 2007. This year saw it open at about 3200 point, see a maximum of 5200 or so in mid-June and crash back to stand at 3211 points today (Monday). It is estimated that 80% of investors in the market are individuals rather than institutional investors. The Chinese authorities have intervened in the market to prop it up, but these actions have had no long term effect in reversing the sharp decline.
The devaluation of the Yuan was intended to boost the economy by making Chinese exports cheaper. It had appreciated against other major currencies as it was shadowing the Dollar’s rise. This could have provided a fillip to the market, but didn’t. The latest move allows the state pension fund to invest up to 30% of its assets in the domestic market, but as yet this has failed to produce the desired result.
The dramatic decline of the Shanghai index (30% since mid-June) is putting negative pressure on major markets around the world. The FSTE 100 index was down by a further 2.6% by the end of the morning trading session (Monday) following on from a loss of 5% last week. The Dax and CAC have seen similar falls and the Shanghai composite itself shed 8.5% in Monday’s trading; its worst one-day loss since 2007. The Hang Seng fell by 4.9% whilst the Nikkei saw 4.6% of its value erased.