Tony Alexander, BNZ economist.

MIL OSI – Source: BNZ Community Blog

Headline: Chinese Stock Meltdown 101 with Tony Alexander

Tony Alexander, BNZ economist.
Tony Alexander, BNZ economist.

Last week it was Greece. This time we’ve asked BNZ Chief Economist Tony Alexander to explain what’s going on with China’s economy and share prices, whether their retail spending could reduce as a result, and what it all means for New Zealanders. Here are his answers.

Why is China’s economy slowing down?
Since 2010, the Chinese economy has matured. People are earning more money, and China isn’t really the cheap producer of goods it used to be. Their export prices are less competitive, and other Asian economies are undercutting them.Their currency is also stronger than it was three – four years ago, when it was deliberately held at undervalued levels. In 2008, China also embarked on a massive fiscal and monetary stimulus to offset the impact of the global financial crisis. This led to a construction boom and now they’ve got too many buildings. So their construction sector is weak at the moment. Then each year, 10 – 15 million people would move from the Chinese countryside to the city to work in factories. This meant productivity was rising year on year and economic growth rates were huge. Now that most of the population has already relocated to urban areas, we’re not seeing that level of growth anymore.

What has caused the Chinese stock prices to fall?
It was a huge bubble. People had been scrambling to get in – it was the place to be. In the first five months of 2015, an extra 42 million people opened up a share trading account. The Chinese Government had been signalling to people to buy shares, so people began to think it was guaranteed money, and every man and his dog was piling in. Then it burst. And before the slow down occurred, we’d seen the Shanghai Share Index rise by about 150 percent in a year. Only four percent of shares on the Chinese share market are owned by people offshore, so that’s not enough to be the blame. A wee bit of a trigger was margin lenders. Many people who were buying shares were doing so on credit. Then when the margin lenders decided to start calling in some of their loans, the market weakened it a bit. And when a market weakens, a lot of people decide to take their money out at the same time. What we’re seeing in China is more of a market correction. Previously, stock market prices had no relationship at all to the state of economy, or even worse, they had no relationship to the state of the companies who shares were being listed. That is starting to change.

Can we expect to see a fall in Chinese retail spending?
Yes, but we don’t know how much. Sales were already pulling back, because earlier this year Chinese leaders had been undertaking a big anti-corruption drive advising Chinese people to stop spending money on luxury goods. So many retailers were already experiencing very weak trading conditions. Revenue in Macau – considered China’s gambling capital – has fallen by about 30 percent in a year. The growth rate of retail spending in China has been weakening for the past couple of years, and you would expect their spending will weaken even further in the next few months. But we just have to wait.

Will all of this have an effect on the New Zealand economy?
It will have a negative effect on our economy, but it’s not necessarily a negative outlook. China accounts for 17 percent of New Zealand’s merchandise export and provides about 14 percent of foreign visitor spending. Foreign students also spend around 800 million dollars studying in New Zealand each year. If the Chinese economy weakens further, we’ll have reduced export. How much of course is impossible to figure out. It is a factor that will make our central bank more willing to cut interest rates, and it adds some downward pressure on the Kiwi dollar. And that’s where the freely floating New Zealand dollar is quite important for us. Because if the Kiwi dollar falls, it helps the exporters. Our pip fruit and wine, and kiwifruit sectors, – who’ve all had a good year – could really benefit. A lower currency would also be good for tourism to New Zealand from everywhere, possibly even China itself.

– –

Selwyn Manning, BCS (Hons.) MCS (Hons.) is an investigative political journalist with 23 years media experience. He specializes in reportage and analysis of socioeconomics, politics, foreign affairs, and security/intelligence issues. Selwyn has extensive experience as a commentator and has provided live political analysis to a wide range of television and radio organizations broadcasting in New Zealand, Australia and globally including the BBC (Five Live, London) and BBC (World Service). He is currently a correspondent to Australia's FiveAA radio, and is a regular live-on-air panelist on Radio New Zealand's The Panel with broadcaster Jim Mora.