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Sunday, 17 January 2016

Shanghai stock sell-off

Shanghai sell

The China stock sell-off continued on its merry way on Friday, with another 3.55 per cent decline. 

For all of the interventionary measures taken in order to attempt to halt the decline, the bubble now looks to be about two thirds deflated, for once such bear markets take hold even the most positive of news may not be enough to stop the rot.

Of course, there are many things which investors around the world might choose to worry about, but China's stock market bubble would probably be relatively low down on that list.

For one thing the market is still about 45 per cent above where it was only two years ago.

More pertinently, stock market valuations bears no regard whatsoever to economic fundamentals - in fact, the market soared by several thousand points as Chinese economic growth slowed - operating rather more in the manner of a giant casino with leverage than any 'normal' stock market.

The above said, the latest correction may itself have the potential to spook other global stock markets, and arguably this has already happened to some extent.

In any event, with the circuit breakers now tossed aside, it may only be a matter of time before Chinese stocks complete their retracement.


Oversupplied property market

Potentially as a result of this we could see billions in further capital flight from China to perceived safer havens such as Australia, despite the capital controls which aim to stem this flow.

American financial commentator Jim Rickards has said previously that Sydney is one of half a dozen worldwide cities that Chinese capital will continue to seek, and through my own on the ground" experience in Sydney (and to a lesser extent, Brisbane) I haven't seen much to contradict that view.

Probably of more consequence to the local economy are the slings and arrows of China's oversupplied residential property market, where prices for now at least seems to have stabilised somewhat following concerning declines earlier in 2015.

China – Residential Property Market graph

Slowing economy

As for China's decelerating economy which continues be impacted by soft external demand, we might expect to see a response through this calendar year in the guise of easier policy through lower interest rates, lower reserve ratios for banks, and potentially some other direct actions to prop up the beleaguered residential property market.

In his annual year in review - through which he anticipates outcomes from the year ahead in advance - Bill Evans of Westpac expects China to use some of its considerable firepower to take other stimulatory measures to act as a boost to consumption in 2016.

Evans sees 2016 as another year which will "disappoint the doomsayers" in Australia, both from a property markets and from an economic perspective.

China's Q4 GDP will be reported on Tuesday, with the market expecting growth to come in at 1.8 per cent for the quarter and 6.9 per cent for the year.