China’s stock-market routs and economic deceleration are widely cited as the major trigger for the latest round of global market volatility. But what if the dominant narrative about China—that the world’s No. 2 economy is on the verge of falling off a cliff—is wrong?
It would mean the global market turmoil hitting equities, commodities and currencies is an overreaction.
“We may have seen overshooting,” said Hung Tran, executive managing director of global capital markets at the Institute of International Finance, an industry group representing around 500 of the world’s largest banks, funds and other financial institutions.
Even the head of the International Monetary Fund indicated as much earlier this week.
One of the chief problems is that it’s difficult to gauge China’s black-box economy. The country’s true growth is a guessing game given a number of statistical factors. That’s why growth forecasts show a range spanning several percentage points. Lombard Street Research, for example, estimates the economy will only expand by 3.7% this year, nearly half Beijing’s official growth forecast.
Even if China’s economy is healthier than many now fear, uncertainty is oxygen for market volatility. More clarity from Beijing about growth prospects and crisis-management plans would likely prove fruitful. That’s why the U.S. plans to press Chinese officials for greater details on their policy plans at a meeting of finance ministers and central bankers from the Group of 20 largest economies late this week.
Here are some of the arguments that might moderate market fears:
“Investors should not get carried away by the collapse of the Shanghai Composite Index,” warns Melanie Debono from Capital Economics in note to clients, “not least because its performance often bears little relation to that of the economy, primarily due to wild swings in its valuation.”
The market run-up in advance of the selloff was out of step with reality, says Nick Lardy, a China expert at the Peterson Institute for International Economics. That’s why he says there’s likely more to come in the Chinese market correction. Even after the rout, “The market was still trading at 39 times earnings. Give me a break, it’s still too high.”
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