China's sharemarket has shown signs of life again over the last week, yet it remains heavily in the red over the last month in what some people have likened to the Dow Jones crash in 1929.
The Shanghai composite, or the SSE Composite Index (SHA: 000001), surged almost 60% between the beginning of January and mid-June as investors pumped their funds into heavily overvalued stocks. Indeed, the Fairfax press put it perfectly when it said that: "For China's 90 million share traders, the market is the best casino outside of Macau."
But the high flyers soon came crashing back down in what was one of the most violent sharemarket crashes in history. The Shanghai market plummeted more than 32% in roughly three weeks, wiping out trillions of dollars of shareholder funds in the process.
You can see why the massacre was referred to as "China's 1929" event.
What all this means for you
Indeed, the Chinese market has managed to regain some of its composure over the last week or so, recovering just over 13% since it bottomed out at roughly 3,500 points on 8 July. But investors are still concerned there could be more pain waiting around the corner.
The real concern is that the stockmarket massacre could spill over into the real economy, impacting confidence and overall economic growth. If Chinese investment came to a halt, that would be devastating for Australia given that they are, by far, our largest trade partner.
The fear has certainly been reflected in commodity prices most recently with iron ore in particular enduring a sharp selloff. After trading at roughly US$66 a tonne last month, the resource crashed more than 32% and hit a new low at around US$44.50 a tonne. Oil and copper prices were also heavily impacted, as were companies that mine each of these commodities such as BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Woodside Petroleum Limited (ASX: WPL).
Notably, falling confidence in the Chinese sharemarket could be a boon for Australia's property market (not that we need prices to climb any higher – particularly in Sydney and Melbourne).
Many people have pointed to Chinese investment in Australia's property market as one of the reasons prices have risen so strongly, and that could continue if investors continue to pump money into the market due to lack of alternatives. That could be great for companies such as Brickworks Limited (ASX: BKW) and Boral Limited (ASX: BLD) in the long-run.
Will the rebound last?
Unfortunately, it is impossible to tell where the Chinese sharemarket will go from here, or how long a recovery will last if one does eventuate. Indeed, the Chinese government has gone to desperate measures to control the selling of shares and those initiatives could become unwound at any point in the future.
In saying that however, the Australian sharemarket has also been heavily impacted as a result of the enormous uncertainty surrounding the situation, which has created an excellent buying opportunity for long-term focused investors.
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