The Chinese government went to extreme measures to arrest stock price falls during the country's recent sharemarket meltdown. So far, they appear to have worked with the market climbing strongly over the last three weeks but there are fears that there could be more pain waiting around the corner.
What happened?
In just three weeks, Shanghai's SSE Composite Index lost almost a third of its value in an event that could have proven catastrophic for the global economy.
In order to prevent further disaster, the government introduced a number of measures including threatening short-sellers with arrest; banning major shareholders from selling stocks; and encouraging companies to support their own equities by buying back their own shares.
Although it's still sitting more than 21% below its recent multi-year high, conditions certainly seem to have improved with the index rebounding a remarkable 20.7% since it bottomed out at 3,373 points on 9 July.
Crisis averted?
Local investors certainly appear to be growing more comfortable with the situation unfolding in China with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) strengthening in recent weeks. But while a crisis appears to have been avoided thus far, there are fears that the impact of China's recent stock market plunge could still spill over into the real economy.
As quoted by the Fairfax press, Bridgewater Associates, which is both the world's largest hedge fund manager and bullish on China's economy in the long-run, said in a recent note to clients that "our views about China have changed as a result of recent developments in the stock market."
Fairfax notes that households account for roughly 80% of trading volumes on China's stock markets meaning that they will be impacted heavily by the recent crash. Bridgewater estimates that the losses could amount to roughly 2.2% of household sector income and a whopping 1.3% of GDP, not to mention the impact it will have on the market's confidence to continue investing in the sharemarket in the future.
What this means
China has been the engine room for the global economy over the last decade in what has possibly been the greatest infrastructure boom witnessed by mankind. Although it is still growing at roughly 7% per annum, the nation's growth is certainly petering out and it was hoped that China's middle-class would take over the growth, turning it into more of a consumer economy.
If their wealth is wiped out however, how will China possibly take the leap into that new growth stage? That is especially true if their confidence is shattered with many refusing to ever return to the sharemarket or spend as a result of their inflated debt loads.
If China's growth strategy becomes jeopardised, that could have serious implications for Australia given that they are our largest trade partner. Indeed, the impact was reflected in the price of commodities recently which plunged on expectations of slowing demand. This was particularly prevalent in the price of iron ore, copper and oil which all plummeted in value.
As a resource-rich economy, lower commodity prices are not good for Australia which could dampen our own growth in the coming years. It also dampens the prospects for Australia's resource producers, including BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Newcrest Mining Limited (ASX: NCM) (to name just a few), all of which investors should continue to avoid with further falls anticipated.
More volatility?
Coupled with the threat posed by Greece's debt situation, China's sharemarket meltdown took its toll on Australia's own share market which saw it plummet to a fresh five-month low late in June. While it has managed to regain some composure since then, some investors remain hesitant to return to the market out of fear of further volatility in the future.
Unfortunately, there is no way of knowing what will happen on the market, nor is it possible to predict the impact it will have on the economy as a whole. While now could be an excellent time to start building some long-term positions in some of the market's quality corporations, investors also need to be prepared for further implications should China's economy start to wobble.
