The China story in five charts
The Shanghai Composite Index declined 8.5% on Monday, despite the Chinese government spending billions to prop up the stock market. How did things come to such a pass
The Shanghai Composite Index declined 8.5% on Monday, its biggest fall in a single day since 2007. The plunge happened despite the Chinese government spending billions to prop up the stock market. How did things come to such a pass? Here are five charts that tell the story.
RISE AND FALL OF CHINESE INVESTMENT
After the 2008 financial crisis, China made a huge investment push to sustain growth. The chart shows how China’s total investment as a percentage of gross domestic product (GDP) went up sharply in 2009 and 2010.
Investment has since fallen off sharply, as the government realized that malinvestment was creating ghost towns and a real estate bubble, and decided it should focus on driving consumption-led growth.
WHEN CHINA SNEEZES, COMMODITIES CATCH A COLD
China’s thrust on investment and construction activity led to a commodities rally. The Thomson Reuters CRB Commodity Index rose to around a two-year high in April 2011. The fall in the index from 2012 coincided with the falling off of China’s investment as a percentage of GDP. The commodity index is now lower than it was even after the Lehman crisis.
GROWTH ENGINE SLOWS
The chart shows the fall in China’s GDP growth after 2010, as the investment boom faltered. Growth is expected to slow to 6.8% in 2015 and 6.3% in 2016, according to the International Monetary Fund, as China switches gears from an infrastructure and real estate investment-driven economy to a consumption-driven one.
HOUSING BUBBLE DEFLATES
The chart shows consumer price inflation in Chinese residential property. China’s over-investment created a real estate bubble as money poured into the sector. It was no surprise that lines of vacant buildings finally started reflecting in the data. Notice the steady fall in housing prices after 2013.
GRAVITY ASSETS ITSELF
The government realized that investment-driven growth had failed, but its push to drive consumption hasn’t gone as planned. Meanwhile, the corporate sector had become hugely indebted and banks were in trouble. The government encouraged people—mainly retail investors—to put money in the market by cutting lending rates. The hope perhaps was that higher stock prices would make investors richer and boost consumption, and also pave a way for companies to raise equity, bringing down their debt-to-equity ratio.
But the economy was in trouble, seen from the manufacturing Purchasing Managers’ Index (PMI). The chart shows that the stock market took off at a time when the manufacturing sector was starting to shrink. Since December 2014, the manufacturing PMI has been below 50 for six months, which means the sector contracted in these months. Fundamentals soon asserted themselves and stocks, which had gone up on borrowed money, fell dramatically.
The government panicked. It stopped stocks from trading, banned selling by promoters and mobilized huge amounts of money to prop up the markets. It was successful for a while, but Monday’s action shows that the battle is far from over.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!