In the summer of 2015, the unexpected downturn of the Chinese Stock market took the world by surprise. Consequently, the global financial market was thrown into turmoil as the events in China sent shockwaves across other established markets. China is the second biggest economy in the world and the developments of its stock market are a cause for concern for various stakeholders including national and international financial market players around the world. The downturn of the China stock market has witnessed the shanghai Composite Index lose over 40% in value between 2015 and 2016 (El Montasser, Fry, and Apergis 3).
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Most of the financial players in the world reacted in a speculative manner as opposed to outlining how this market crash would affect their own interests. A few months afar this phenomenon unfolded, it has now become clear that the reactions of most financial analysts were mostly borne out of panic. Other players were too quick to compare the China market crash with the events that took place in the United States between 20008 and 2009 and the subsequent Euro zone crash of 2011 and 2012.
It is now clear that most of the initial reactions to the crash were exaggerated. Nevertheless, the Chinese market crash is expected to have far-reaching effects on the global economy whereby most of the shock would be felt by its main trading partners in Europe and the United States. in 2016, the United Kingdom (UK) outlined some of the threats faxing its economic prospects to include “the foul combination of $33 oil (£22.30 – an eleven year low), bubbling middle-east tensions, the prospect of rising interest rates and rapidly disintegrating Chinese equity markets” (Kundu and Sarkar 300).
Although the issue of the Chinese market crash for the UK was initially lull, its persistence is likely to have significant impacts on the financial services of the UK and the EU in general. For instance, the UK government has instituted ‘circuit breakers’ to the effects of the China market crash by suspending trading on several occasions. This essay investigates the impacts of the Chinese market crash on the UK. The paper looks at the gravity of the market disaster in China and analyzes whether the events in Shanghai could be mirrored in the UK.
Currently, the epicenter of the problem is in China whereby the country has done all that is in its power to arrest the situation. However, the authorities in China have proved to be misinformed in their understanding of the stock markets and their underlying dynamics. Consequently, the panic in China has had significant impacts on other stock markets around the world. For example, the situation in china has prompted a decline in the FTSE among other major global financial markets.
The panic behind the free falling Chinese market is mostly fueled by the fact that this phenomenon bears striking similarities to other distasteful financial events of the twenty-first century such as the ‘dot com bubble’ and the financial crisis of 2008. For instance, the dot com bubble prompted the NASDAQ to grow by 200 percent in a span of one and a half years but this growth was reversed within a similar period. In China, the “, the CSI 300 gained about 150% in only a year, and in only six months it has erased two thirds of that growth” (Jayech 631).
One of the factors that make the China market crash such a challenge to the UK is that this phenomenon is more of a symptom than a problem. Consequently, for most part of the year the UK has been reacting to signs as opposed to the problem itself. A closer analysis of the situation in China indicates that continued investments have led to a scenario of oversupply in China. The demand for previously sought after commodities in China such as constructions and smart phones has declined thereby creating gaps in demand and supply dynamics. In China, the market crash will have certain direct impacts including the scenario where investors are likely to lose their stock equities.
However, it has since become clear that the course of the Chinese economy will not be changed by the market crash. For instance, the Chinese government still maintains that the country’s economy is growing by 7% annually although experts adjust these figures to a more realistic 3%. Furthermore, the Chinese stock market is mostly a playground of the country’s nationals and only a small portion represents foreign markets. This means that British nationals are not affected by the market crash on a personal level. On the other hand, “China is basically an import partner for Britain and Europe and only 3.7% of UK exports go there” (Liang and Willett 212). Therefore, the prospects of the Chinese market dragging the UK into a deep economic turmoil are slim.
The China market crash can also have an impact on the British commodity markets. Nevertheless, the collapse is most likely to be felt only by companies that have significant interests in China including mining and oil companies. For a long time, some of the European companies that operate in China have been benefitting through the inadvertent inflation of growth in the country. The current downturn has caused the prices of these foreign interests to fall thereby forcing some of these companies to take drastic measures to readjust.
For instance, Western-based companies such as Anglo American and Glencore have had to sell some of their assets and institute cost cutting measures in an effort to reduce debts. British-based oil companies have also been exposed to the risk that results from the China market crash. However, these companies have not suffered any major economic misfortunes except for American-British Company Shell, which recently reported a loss of six billion dollar loss due to a dip in its asset portfolio.
The current situation in China does not spell doom for British and European companies operating in this country. Nevertheless, most of these companies have to institute drastic measures and maneuver through tough conditions for them to avoid the aftershocks of the crash. For instance, “banks like HSBC and Standard Chartered that are highly exposed to that part of the world, will continue to face tough conditions for some time to come, but in a sense the shock is over” (Zhu 36).
Most economic experts concur that at the moment it is unlikely for commodity prices to fall lower that their current state. For instance, at approximately $22, oil is unlikely to venture into the $10 territory. Consequently, for the UK businesses that operate in China and the ones that have managed to adapt their prospects are quite encouraging. Another group of analysts argues that the low commodity and oil prices present an opportunity to companies because this phenomenon reduces costs of production and increases profit margins.
Britain has vast interests in other areas within the Asia Pacific region and this is where the real risk lies. Eventually, the recession that is coming to China will be felt across all other countries within the Asia Pacific region and at this point the effects of the market crash will have gone through a full circle. Therefore, Britain cannot afford to ignore the current state of the Chinese economy. The events of the China market crash have been rapid but they have given outside parties enough time to make adjustments. In this regard, the imminent recession in Asia Pacific should not be a major challenge to Britain. For instance, the slowdown only requires companies to cut costs and adjust accordingly.
One of the strongest sectors of the UK economy at the moment is the property market. The property market appears to have an underlying immunity as far as the shocks in the global economy are concerned. On the other hand, the FTSE 100 has a lot o influence on the UK property market. This situation raises the question of whether the current dip in FTSE as a result of the China market crash is likely to affect the property market. For instance, the China market crash has been observed to cause a dip of about 6.5 % in the UK stock market.
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Nevertheless, the property market has not absorbed any of this declines and it continues to flourish. Current statistics indicate that “property prices in the final quarter of 2015 were almost 10 per cent higher than one year earlier” (Kundu and Sarkar 301). Another property consultancy firm Your Move, “indicates that the average property in England and Wales has leapt £18,000 in the last year to £292,077, a growth rate of an incredible £1,500 a month” (Kundu and Sarkar 303).
The effect of the China market crash on the property market would most likely depend on how it impacts the interest rates. Currently, borrowing rates in the UK are at an all-time low. Consequently, British citizens have been on borrowing spree and they have managed to rack up a debt of £40billion in the process. If the stock market continues to lose points as a result of the China crash, the interest rates might go up. This would prompt a panic selling thereby destabilizing the property market. On the other hand, the instability of the stock market has contributed to popularity of the property market. Therefore, the China crash could end up driving the property market upwards as investors seek for alternatives to the stock market.
Although the initial reaction to the China market crash was that of panic, subsequent effects have downplayed its impact on the UK economy and the world at large. The fact that the Chinese stock market only accounts for about 2% of foreign investment makes the effects of the crash more domestic than international. The crisis has also coincided with a decline of commodity prices in UK and the rest of the world but none of these two developments can be attributed to the other. As far as the UK property market is concerned, the interrelation between the crash and local market dynamics has not produced any significant effect. Nevertheless, the China market crash could culminate into a recession that could have direct impacts on the Pacific region and indirect effects on the UK.
El Montasser, Ghassen, John Fry, and Nicholas Apergis. “Explosive Bubbles in the US–China exchange rate? Evidence from Right-Tailed Unit Root Tests.” China Economic Journal (2016): 1-13. Print.
Jayech, Selma. “The Contagion Channels of July–August-2011 Stock Market Crash: A DAG-copula based approach.” European Journal of Operational Research 249.2 (2016): 631-646. Print.
Kundu, Srikanta, and Nityananda Sarkar. “Return and Volatility Interdependences in up and down Markets Across Developed and Emerging Countries.” Research in International Business and Finance 36 (2016): 297-311. Print.
Liang, Priscilla, and Thomas D. Willett. “Chinese Stocks during 2000–2013: Bubbles and Busts or Fundamentals?.” The Chinese Economy 48.3 (2015): 199-214. Print.
Zhu, Huiming. “The Heterogeneity Dependence between Crude Oil Price Changes and Industry Stock Market Returns in China: Evidence from a Quantile Regression Approach.” Energy Economics 55 (2016): 30-41. Print.