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The stomach-churning plunge in Chinese stocks is taking a heavy toll on Canadian markets, and Beijing’s failure to stanch the bleeding threatens further volatility in the weeks ahead.
China’s Shanghai composite tumbled 8.5 per cent Monday – that’s the equivalent of a 1,200-point drop in Toronto – as government support of equity markets could not stop the majority of stocks from falling by the maximum 10 per cent limit.
The Chinese benchmark has now declined by 28 per cent since its mid-June high.
The market collapse underscores a significant slowdown in China that is rippling through the global economy. Trade activity in Asia is declining rapidly. For example, the CPB merchandise: Asia import volume index (the CPB Netherlands Bureau for Economic Policy compiles the most widely used trade benchmarks) has slid 12 per cent so far in 2015. Sluggish trade activity strongly suggests China’s gross domestic product growth is slowing, and lends support to those questioning the validity of government reports on the economy.
Now that optimism in mining sectors has all but disappeared, fewer Canadian investors are following what happens in an economy halfway around the world. This is a mistake, in my opinion, and one that could result in Canadian investment portfolios getting blindsided by an economic hard landing in China.
For Canadian investors, the sharp slowdown in Asian import activity has direct implications for domestic resource stocks. Despite the recent dismal performance by the domestic mining and energy sectors – the S&P/TSX diversified mining index is down 15 per cent year-to-date and the energy index is lower by 16 per cent – the commodity complex still forms 29 per cent of the TSX.
Although energy and mining stocks are not dominating the Canadian equity market benchmark as they once did, Canadian stocks as a whole retain a remarkably close association with the China-dominated emerging market equity benchmark.
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