It was with relief that we all started to notice the Chinese markets rebounding near the end of last week as many foreign investors started to pour money into what is still an overpriced market.
China’s market was one of the world’s best performers in the 12 months to mid-June, rising 150% before the mother of all corrections set in. Market capitalisation plunged 30% over 20 days with US$3.8 trillion in wealth wiped out before the government stepped in with stern measures to curb panic selling.
Beijing’s initial response included a trading halt on companies representing 40% of market capitalisation. What the Chinese government did not anticipate was that when these shares are allowed to trade again, the selling spree could return, although at a slower pace.
That’s when Beijing brought out the big guns, “persuading” major shareholders of listed companies not to sell for the next six months.
Problem solved, for now, in typically heavy-handed Chinese fashion. But by interfering with the market mechanism, Beijing has put another black mark on its record.
For years China has been attempting to make Shanghai a globally accepted equity market — the new Hong Kong, authorities hoped — and the yuan a true global currency. But putting a brake on how the market functions is simply taking 10 steps backward. It’s no surprise that retail investors account for 80% of equity trading in China while big international funds look elsewhere.
In any case, the selling spree has once more raised the question about whether the Chinese economy will make a soft landing or a hard one. By acting as it has, the government has managed to put an end to the free-fall but it has also raised a million other questions for the investment community.
No markets are foolproof. The surge of 150% in company share prices despite a slowing Chinese economy should have been flagged by the authorities earlier, though the downside risk was, as they say, being monitored. What kind of free market mechanism is this?
What happened in China sent shivers down the spines of investors there, but globally the consequences could be even worse. Commentators and politicians are almost unanimous that the prospect of Greece leaving the euro zone pales beside a Chinese meltdown in terms of impact on the world economy.
China today is one of the largest contributors to the global economy as a manufacturer, a consumer of raw and semi-finished materials, an importer of consumer goods, and an outward investor in everything from property to infrastructure.
Just as significant is Chinese people’s desire to spend all over the world, most notably on tourism in places such as Thailand, and to satisfy a huge appetite for high-end products from handbags to watches, paintings, jewellery and wine.
Their contribution to the economies of countries such as Thailand has become very evident. Chinese now account for a quarter of all foreign visitors to the Kingdom and their country consumes 13% of all Thailand’s exports.
Given that the Chinese see Thailand as a great value-for-money destination, the impact of a Chinese slowdown on tourism should be modest. However, what needs to be watched is exports, which already are in the doldrums and could decline further if manufacturing activities in China slow down.
With negative sentiment prevailing in China, Thailand’s exports that account for more than 65% of GDP could sink further. They fell 5.5% year-on-year in value on May and are off 4% for the first five months, causing economists to keep revising their 2015 growth forecasts downward.
With problems in Europe and China, and signs that the economies of the United States and Japan continue to stumble on their way back to full health, there appear to be few avenues forward for countries such as Thailand. Its key pillars of growth — exports, tourism and consumption — are all falling flat and time is running out for moves that could help arrest the decline.
This week we are expecting some more concrete announcements from Thai government about its heavily hyped infrastructure spending. It is my hope that these projects do get off the ground even if there are questions raised about their long-term viability.
As private investment, consumption and exports are all drying up, the only hope remaining for Thailand to pull itself out of the slump is to spur government investment. Details of the double-track rail system could be really positive news and could help the country to deal with the economic problems we all are facing.