In January 2016 stock markets around the globe suffered a second bout of China-inspired jitters. In less than six months global indices and other higher risk assets, like oil, hit the skids.

Fears the Chinese economy was headed for a ‘hard landing’ led to panic selling across the board and Chinese shares are under renewed pressure at present. Since 22 November the MSCI China index is down nearly 9%. Could we see a repeat of the volatility of two years ago in early 2018?

ChartChina

Source: Capital Economics

Capital Economics markets economist Oliver Jones offers some comfort. He notes the recent sell-off is less connected to the Chinese economy and financial system and more to a reversal in fortunes for Chinese IT companies, like Tencent and Alibaba, which enjoyed a strong run in early 2017.

WHAT IS DIFFERENT TODAY?

‘What’s more, in contrast to 2015-16, the shares of Chinese companies listed offshore have been hit much harder than those listed onshore,’ says Jones.

He does see some risk this tech-inspired weakness could snowball with China’s IT sector still trading at a significant premium to global peers.

‘However, so long as this did not translate into concerns about broader economic weakness, we suspect that any correction in global equities would not be especially large, or last very long,’ Jones adds

He reckons the next sustained slump in global markets is more likely to be connected to the performance of one of the major developed economies, with the US the most probable candidate in his view.

 


Issue Date: 07 Dec 2017