On Monday, prices of mainland Chinese shares sank by 8.5%, their second biggest fall in history. Tuesday also saw massive swings in the Chinese equity markets, initially plunging 5% before shifting into positive territory and then ending trade down by 1.7%.
Earlier this week, the China Securities Regulatory Commission (CSRC) put out a statement saying it will “continue efforts to stabilise market and investor sentiment and prevent systematic risk”.
The People’s Bank of China also said it will inject 50bn yuan (£5.2bn, $8.1bn, €7.3bn) into the money markets.
Despite the fact that investors are concerned that the falls in China’s stock market will spill over into other regions, Lars Kreckel, equity strategist in Legal & General Investment Management’s asset allocation team does not think it will affect international markets.
Sitting on gains
He has given three reasons for this: “Firstly, most of the volatility in China has been in A-shares, a category dominated by domestic investors.
“Few domestic investors have access to international stocks, and so it’s unlikely we’d see redemptions in other markets or assets to shore up losses from Chinese equities.
“Secondly, foreign investors are also unlikely to become forced sellers of global equities as they did not participate in the rally,” Kreckel said.
“Thirdly, let’s not forget that the Chinese market is still up 80% to 90% year on year. A small group of high net worth Chinese investors may be nursing losses, but many are ultimately sitting on gains from investing in equities over the last year or two.”
But he said this isn’t to say L&G Investments are not closely watching the behaviour of the Chinese markets: “It is certainly one of the risks we keep a close eye on, but a hard landing as a result of the equity bubble imploding looks unlikely.”
Price changes
Despite Kreckel’s view, volatility in the Chinese market seemed to cause changes to prices across the rest of Asia, with the Nikkei falling by 0.04% on Tuesday, the Topix falling 0.34%, and the ASX in Australia dropping by 0.21%.
In Hong Kong, however, the Hang Seng rose by 1.52%, reversing a weak start.
Frustrated investors
Julius Baer’s head of fixed income research, Markus Allenspach, said the problems within the Chinese domestic market could support the Hong Kong market in the medium term because investors will appreciate the latter’s lower volatility, lower valuation and better liquidity.
“Investors are frustrated, however, about the lack of coordination among Chinese authorities to support the market,” he said.
“Rumours are circulating that the Chinese central bank refuses to cut interest rates in support of the equity market and has even withdrawn funds from the Chinese Securities Finance Corporation (CSFC), the special entity that was supposed to support the market in recent weeks.”
Comfortable
Peter Thompson, president of ETF provider Source, said the focus is now on liquidity and tradability.
“The perception in the market is that the long term growth story for China remains intact, despite this short-term price action,” he said. “Investors in emerging markets should be comfortable with a commensurate level of risk.”
