Actuarial news and views from Cape Town and beyond

Chinese Equity Market Plunge

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China is dominating the headlines lately because of the alarming 30% plunge in the local A-share equity market (i.e. shares in mainland China-based companies that are generally only available to Chinese citizens) and the government’s panicked response. This may also have an impact on the global macro and market picture.

Jacobson argues that China is unlikely to suffer a hard landing, mainly because of the country’s financial resources and ability to adjust monetary and fiscal policy. Given improving growth and easy monetary policy in the developed world, the likelihood of a global recession is low. However, risks to China’s growth have increased. Greater uncertainty about the effect of the stock market decline on the real economy and the government’s ability to manage the economic downturn smoothly increases risk to China’s growth.

While the sell-off has been sharp, there are still many high-quality companies in China, especially large caps, whose valuations never reached bubble extremes and which still look attractive. The correction could have ripple effects given the psychological impact of market losses and the perception that the government’s response, which included banning short sales, creating a fund for brokers to purchase stocks, directing pension funds to buy more stocks, and suspending initial public offerings, has lacked coordination and impact.

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