Negative indicators for the Chinese economy are mounting, as the country’s leadership attempts to mitigate the damage in the aftermath of a huge stock selloff that began in June of this year.
With business confidence dropping, the MNI China Business Sentiment measure sank to 48.8, its lowest level since January of 2009. The MNI gauge is based off a monthly pool to business executives on the mainland and show that the drop in the stock market of $3.9 trillion is clearly having an effect. Should the trend continue in the face of drastic efforts by the Chinese government, the impacts could be great for China and its trading partners.
The future productions expectations indicator dropped to its lowest level since 2009, despite the fact that credit availability for businesses is at a five-year high. In an effort to spurt investment, the reserve ratio requirement for banks has been dropped, in addition to a move by the China Securities Regulatory Commission of a six-month ban on selling by shareholders who hold more than 5% of a company.
It doesn’t seem to be all bad news, as China continues to grow at seven percent year on year for the second quarter, beating economists’ forecasts of 6.8 percent. Some have questioned the official data, saying that growth has been supported only by consumption. With median price to earnings ratios currently sitting at 63, (well above all the world’s top ten markets), and a real estate crisis with double the number of vacant homes as the U.S. had during the peak of its housing crisis, the situation looks dire. Purchases of stock are being backstopped by the People’s Bank of China and there is currently a suspension on IPO’s. Alongside all the hand wringing over the possibility of a “Grexit,” the decline of China, the second largest economy in the world, will have much larger effects than Greece’s implosion.
As the Chinese stock market continues its somewhat eerie reenactment of the Wall Street crash of 1929, what will happen when these government measures are ceased, and how long will it be until that happens?