The impact has already been seen in global commodity prices. This argument can also be extended to US corporates exposed to China. Once Europe wakes up from the Greek nightmare, corporations heavily exposed to China – of which there are, many especially in Germany – may need to revise their revenue projections and perhaps their investment plans. Commodity markets and stock markets in the rest of Asia have been the first to react but we should see more coming in terms of revised growth projections in the rest of Asia. Given that the wealth effect is relatively limited in China (households have large savings and are not leveraged), the largest impact will probably be on private investment.Īs China’s growth projections are revised downward, others will feel the pinch as well. Consumption and private investment will sure be hit by such a spike of uncertainty. Chinese banks will also be affected indirectly in as far as they will need to support Chinese corporates in these difficult times.īeyond these direct effects, it seems clear that confidence in China is being severely affected by this event.
This might be an urgent problem for those corporations which had relied on IPO plans. The most immediate effect will be on China’s corporates and banks, who will not be able to access the equity market for quite some time. This was more of a shock to the system than one might imagine, as margin financing in China is much larger than in other stock markets.Ĭhina is clearly undergoing a systemic event which will have consequences for both China and its partners. At that very same moment, China’s securities regulator announced measures to cool down the market, which amounted to banning brokerage firms from providing unregulated margin funding to investors. First, the was a wave of profit taking after the Shanghai benchmark index broke through 5 000 in early June and doubts emerged about further easing from the PBoC. The sudden collapse of the Chinese stock market had two triggers. The demand for stocks was abundant for two main reasons: the real estate market was no longer a venue for quick gains and shadow banking is less accessible than before – not to talk about the even lower interest rates offered on bank deposits after monetary easing. The problem with all of this liquidity is that it only fueled additional leveraging, including for gambling on the stock market. This was done through several interest rate cuts and by lowering the liquidity ratio requirements. The PBoC danced to the Government’s tune, easing monetary policy since November last year. To make a long story short, China’s governments needed a bull stock market to transfer part of the cost of cleaning up its corporates’ and banks’ balance sheets from the state to private investors, including foreigners. On the other hand, Chinese banks are not only heavily exposed to these corporates, being still their main source of financing, but also to local governments whose huge borrowing from banks is starting to be restructured. On the one hand, corporate debt has grown sixfold from 2005 levels. The need for Chinese corporations and banks to avail themselves of fresh equity cannot be underestimated.
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