China Moves to Halt Sharemarket Rout

China Moves to Halt Sharemarket Rout

China stock-market-1024x681
Well, with all eyes on the dramas in Greece, for some it’s overshadowed the more worrying concerns coming out of China.
And if you feel Greece is Europe’s problem, you’re probably not alone – but China is a lot closer to home and the slump has triggered fear of a worrying slowdown in the country’s economy.
Thanks to ANZ for the following information on what’s happened and an idea of maybe what lies ahead.
Chinese policy makers have released several new measures to halt the slide in share prices. What’s going on?
From go to slow(er)
It is no secret that the Chinese economy has been slowing since 2010, though it continues to grow at a much faster rate than developed economies. Recently China’s growth was reported to be 7% for the first three months of 2015, but real activity indicators suggested growth momentum was far more sluggish.
Before the recent slump, the Chinese share market had more than doubled since June 2014 and appeared to be helping to stabilise the Chinese economy. Property transactions and home prices picked up as consumer confidence improved and Initial Public Offerings (IPOs) re-started in the middle of last year, providing access to capital for many private companies. There were also anecdotes that the ‘wealth effect’ from the share market was providing a boost to domestic consumption.
China’s slowdown is partly a result of the government’s desire to focus on transitioning from an investment-driven economy to one that is more dependent on consumption. At the same time, the large stimulus program used to support growth during the Global Financial Crisis (GFC) had left Chinese local governments with large debt burdens, making it hard for them to fuel further growth with more credit. Meanwhile, banks remain wary of lending further to companies to help them grow, despite multiple interest rate cuts and the slashing of the amount of money banks need to keep aside for lending.
Action!
Following the biggest three-week rout in China’s main share market index (the Shanghai Composite Index) since 1992, Chinese authorities sprang into action to stabilize the market, fearing social and economic instability if things worsened. Besides taking action against short sellers, they relaxed margin lending rules, cut trading fees and slowed the pace of IPOs. Over the weekend, China announced that a group of brokerage firms will invest RMB120b (US$19.3 billion) to set up a market stabilisation fund. The Chinese central bank will also provide short-term funding to the state entity which makes margin loan financing available to the brokers.
It remains to be seen whether the authorities’ measures will have a meaningful long-term impact. While the valuation of the broader market is approaching more reasonable levels after the recent decline, shares in smaller companies (‘small cap stocks’) and technology-focused shares are overvalued and the bubble may be about to burst.
What’s ahead?
We see issues in China as being far more important for financial markets than the debt crisis situation in Greece. While uncertainty around whether Greece exits the euro zone is likely to cause market jitters in the coming months, we don’t expect this to have a major impact on markets longer term. However the situation in China has the potential to be much longer lasting given its importance in the global economy, especially for Australia as China is its largest trading partner.
It is not so much the Chinese share market falling that’s concerning, but rather what follows. If the share market drop harms business and consumer confidence in China, then it would worsen the current slowdown. Declining wealth may also hinder consumer spending and slow the economy’s transition. Moreover, the weaker share market will make it more difficult for businesses to reduce debt levels down to more manageable levels without weakening growth, as seen in developed economies post the GFC.
We have been expecting a slowdown in the Chinese economy and have a negative position to emerging market shares. We have also been fairly negative towards Australian shares and the Australian dollar because the Chinese slowdown sways commodity prices downwards, and the Australian economy as a result.
That said, we consider Chinese policy makers will be successful in stabilising growth at a reasonable level, though more action may be required.
We hope you found this Market Flash a useful insight into the recent share market events in China and our investment views.

Yes or No? The Greek Referendum – what will the outcome mean?

A big Thank You to the team at Ord Minnett for the following analysis on what a Yes or No vote will mean in the Greek Referendum on Sunday …
We draw on work from our global counterpart to understand what a “yes” or “no” in Sunday’s referendum could produce. Either way, the path for Greece has become even trickier. It almost goes without saying that investors should not expect a quick fix to the situation, although a “yes” vote is likely to provide some relief for markets in the near term.
Firstly, it now appears inevitable that the Greek referendum on “the proposals from the institutions” will go ahead on Sunday. Under the scenario of the “yes” vote succeeding, outcomes are ultimately likely to prove stabilising but could be volatile in the meantime. Key uncertainties relate to who will govern Greece and what will be negotiated in the aftermath of the second bail-out program’s expiration.
Under a “no” vote, positions on both sides are likely to harden and the situation worsen rapidly. This raises risks of more extreme political and economic outcomes, including of course, a Greek exit from European monetary union.
Yes, with a complicated path towards stability (60% probability)

  • Given the greater probability based on polls, this represents a base case scenario. A “yes” vote likely means that PM Tsipras stands down and a national unity government is formed under technocratic leadership. (Readers will recall Greece operated under a technocratic government led by former ECB member Lucas Papademus in late 2011 and early 2012, which added stability for a time). Such a government would have a mandate to secure a deal with the Eurogroup and begin to implement it. Although the terms offered previously are simply not on the table any more, not least because Greek circumstances have changed.
  • A unity government engaged in constructive negotiations would imply an ECB which keeps rolling emergency liquidity and works cooperatively with the Bank of Greece to ensure that the country’s payments system still functions. However, the difficult issue of how the banking system will be gradually returned to full function would also have to be addressed. This is amid little willingness on the creditors’ side to allow large increases in liquidity or to provide funds for banking recapitalisation. Any return toward full function will take time.
  • This scenario will likely produce expectations that elections will follow by early 2016 at the latest.
  • Although Tsipras has made remarks that he will stand down if the vote is “yes”, he is clearly not bound by them. This represents a second scenario, in which he attempts to continue as PM and returns to negotiations. But there has been a complete breakdown of trust and process. As a result, the terms of any subsequent agreement are likely to be extremely detailed and embody an onerous oversight regime. Negotiations over a program will therefore be protracted. It is also worth noting that the demand for debt restructuring from Greece “up-front” has not been dropped. With Tsipiras still in power, the ECB will likely continue to roll emergency liquidity support, but the support for banks would be limited and the negative effects created by capital controls will still exist. It is easy to imagine the ECB setting a deadline beyond which emergency liquidity would cease, effectively forcing Greek authorities to conclude a deal by a certain date or face the permanent closure of the Greek banks as euro-denominated institutions.
  • A third alternative is for Mr Tsipras to call a snap election after a “yes” vote. Such a process would normally take a minimum of three weeks. But given the rapidity with which the referendum has been called, there may be means to expedite this. This would put the rest of the region in the difficult position of having no one to negotiate with who has the authority to make commitments that will bind the incoming administration. It is also unclear exactly how the platform of the major parties would evolve in a new election campaign. Could Syriza (or at least part of it) shift to campaign on the basis of Euro-exit? And how does the rest of the region try to keep some minimal functionality in the Greek economy? A new elections scenario is inherently unpredictable and possibly chaotic.

No, with a slide towards more extreme stress (40% probability)

  • Although PM Tsipras has argued otherwise, many in the rest of the region see the referendum as a means for Greece to decide about Euro participation. In the wake of a “no” vote, there is likely to be a split within the rest of Europe as to how to approach the situation. The European Commission and France (and possibly others) will argue that negotiations should continue with the aim of finding agreement. Others will return to negotiations with their positions hardened against a newly emboldened Tsipras.
  • The “no” vote would put the ECB in a very difficult position. On the one hand, the absence of agreement on a program will lead some to argue that emergency liquidity should halt. This would lead to the bankruptcy of Greek banks while minimal functionality of the payments system in euros would be extremely difficult to sustain. Greece would have little option but to announce a redenomination into a newly launched currency and to nationalise its banks in this scenario. Of course, redenomination brings with it the spectre of hyper-inflation for imported good & services.
  • Even if the ECB chooses to continue emergency liquidity, the limits on the current measures will tighten through time as deposits are withdrawn. Moreover, if the “no” vote creates doubt that the banks will ever reopen, credit cards and electronic transactions will no longer be acceptable as a means of payment in many instances within Greece (even if the Greek state tries to legislate otherwise). Businesses will stop transacting goods & services in return for a bank balance that cannot be turned into cash, and is likely to be redenominated.
  • Combine this with the potential interruptions to the logistics of food, energy and medicine supply created by capital controls, and it is possible to concoct very worrying scenarios indeed. We can imagine the ECB being forced to consider small increments to emergency liquidity simply to retain some value in the claims on bank deposits as a means of exchange, and hence to keep electronic transactions between agents operating within Greece functioning. The balance between that and the ECB’s statutory obligation to lend only to solvent institutions will be extremely difficult (and perhaps impossible) to find.
  • A best guess is that a “no” vote would require a political intervention that hasn’t yet been forthcoming in order to bring Greece back from euro exit. And the dynamics of worsening banking and payments dysfunction would shorten the timescale for such an intervention to a handful of weeks at most.

All eyes on Sunday.

China Moves to Halt Sharemarket Rout

What does the Greek Crisis mean for Investors?

Greece
What has happened?
It’s déjà vu for investors as the birthplace of Western civilization, Greece, once again teeters on the edge of economic collapse.
It marks the latest in an ongoing series of crises for the country after major debt restructuring packages were struck in 2010 and 2012.
But with negotiations between Greece and its creditors breaking down, markets have declined amid concerns of a potential Greek default. However, it’s important to keep the situation in context.
“We will respect the decision of the Greek people, whatever it may be.” Greek Prime Minister Alexis Tsipras.
The size of the $US240 billion Greek economy is about half the size of the New South Wales economy. Greece owes creditors approximately $US350 billion. By comparison, total US national debt currently stands at approximately $US18.6 trillion.
Possible macro-economic impact
European institutions and countries may prove they are able to absorb the losses of a Greek default, although Greek citizens would have to bear the brunt of a failed economy and potential exit from the European Union.
Markets around the world are inter-connected, so concerns lingers about the potential knock-on effects if Greece leaves the EU, with some commentators wondering whether other struggling countries could follow, prompting further losses and destabilizing in Europe. The ongoing uncertainty has prompted a new round of market volatility and uncertainty.
Key Points: The Greek Crisis

  • Greece’s current bail-out program, last negotiated in 2012, expired on June 30.
  • Greek Prime Minister, Alexis Tsipras, walked away from negotiations with the European Commission and instead called a referendum for July 5 to let the people decide.
  • The Greek stock exchange and banks have been shut with ATM withdrawals limited to 60 euros a day.
  • While Tsipras supports a ‘no’ vote to use as a bargaining chip at the negotiating table, European leaders have warned it would likely lead to Greece’s exit from the EU.

How will this affect my investment portfolio?
The Greek referendum announcement surprised investors, prompting a decline in the value of the Australian and New Zealand share markets. Meanwhile, Australian, New Zealand and US bond yields – typically a safe haven for investors – also weakened.
This response is reasonable: markets are expected to become more volatile when the outlook becomes uncertain.
“The confidence effect of a deal, the predictability it would bring, together with the injection of liquidity into the economy from disbursements will restore job creation and growth.” European Commission President Jean-Claude Juncker.
What should I do?
“The IMF also will continue to carefully monitor developments in Greece and other countries in the vicinity and stands ready to provide assistance as needed.” IMF Managing Director Christine Lagarde
While an increase in short-term volatility is to be expected, it’s important to remain focused on your medium-to-long term investment goals during times of uncertainty. I continue to look to keep your investment strategy on track, and note that the Wealth Planning Partners team are always available to discuss any questions you have.

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