Updated 17.19
IN A DAY already being dubbed ‘Black Monday’ for Asian markets, China’s increasingly shaky economy has suffered another blow.
The country’s main share index plunged 8.5% today, wiping out a year of gains and cementing the worst single-day performance in more than eight years.
But the bloodletting wasn’t restricted to shares in the world’s second-biggest economy. The contagion spread to markets in Hong Kong and Japan, both down over 4%, and Australia, where two years of gains were wiped out in a day.
Meanwhile, in Europe there were equally dramatic falls with London’s benchmark FTSE 100 index shedding more than 4.5% and the Irish exchange’s overall index taking a slightly larger plunge (see below).
In the US, markets followed the same pattern before staging a comeback from an initial 3% drop. The Dow on Friday had already moved into a technical “correction” – a fall of 10% or more.
What’s the problem?
Concern has been mounting over China’s stalling economy with worries made worse by the country’s administration cutting interest rates and devaluing its tightly-controlled currency, the yuan.
While the massive economy still grew at a stellar 7.4% last year, that was the weakest figure in nearly 25 years.
It has since delivered lower growth figures for the first half of the year and recent surveys out of the country’s mammoth manufacturing sector showed output was further slowing.
However the greater fear is that China’s communist government has been massaging the numbers and the real data was much weaker than it has been letting on, meaning there was likely to be pressure on company profits further down the track.
Spreadex financial analyst Connor Campbell said:
The fog of fear over the state of the Chinese economy is only thickening, and with little in the way of non-Chinese news to come this Monday, the markets are going to struggle to escape today without some fairly ugly scars.”
Luck of the Irish
With China an increasingly important trading partner for Ireland, news of its economy struggling and the government cutting the value of its currency is a mixed bag for any direct effect on local businesses.
The Republic now does more trade with China than any country outside Europe except the US. For Irish companies reliant on manufactured goods from China, the weaker yuan is a plus: their imports are now cheaper to buy than any time since January.
But on the other side of the coin, food and animals exporters, and the chemical manufacturing sector, are the losers.
Ireland has been aggressively targeting China with dairy products and the collapse in demand from consumers in the Asian country has already been a major factor in the recent plunge in global milk prices.
The longer-term impact will come if China’s wobbles spread further afield and also stifle growth among Ireland’s larger trading partners, many of which are reliant on consumer demand in a country that represents 15% of the world’s economy.
What next?
For now, Chinese officials have been desperately pumping money into stock markets to try and stem the bleeding.
The latest move was to tell the country’s mammoth state pension fund to put up to 30% of its 3.5 trillion yuan (€476 billion) in assets into stocks to help prop up prices.
But analysts are divided on whether the intervention will work, or whether further measures like interest rate cuts or currency devaluation will be needed.
- With AFP
First published 12.38pm
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