Chinese markets plunge 8.5%

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The Chinese stock market has fallen 8.5 per cent, marking the second worst trading day for the country in 18 years.

The Shanghai Composite Index has dropped 28 per cent below its peak, which came just over a month ago on 12 June 2015. Overnight the index suffered its largest one-day fall since February 2007.

However, despite this dramatic fall, Chinese markets are still 11 per cent up on the start of the year, says Hargreaves Lansdown senior analyst Laith Khalaf.

He says: “This tells us how far the Chinese stock market has come in such a little space of time. On the back of such stellar performance it is natural for the market to come back down to earth.”

Over the short-term, Chinese markets have suffered from a boom in domestic investing, much of which is highly leveraged. Government intervention to stop further falls in the markets have also troubled many investors.

However, Khalaf says the long-term picture is better.

He says: “While the exact figures are disputed, China’s economy is still growing at a higher rate than western economies, a positive backdrop for many of the country’s companies. Meanwhile the market appears to be gradually opening up to foreign investment, even if the recent trading suspensions are a retrograde step.”

The problems in China should not be dismissed though, warns JP Morgan Asset Management director of investment management solutions Patrik Schöwitz, as the country accounts for 17 per cent of world GDP on a purchasing power parity basis.

Rather than writing off the country amid fears of more stock market falls, investors need to take a more fundamental analysis approach as opportunities still remain, says Hugh Young, managing director of Aberdeen Asset Management Asia.

“While stock market performance has been below expectations, as bottom-up stock pickers, we remain cautiously optimistic because significant parts of China’s economy are not in state hands or subject to excessive control,” he says.

Mark Williams and Carolyn Chan, managers of the Liontrust Asia Income Fund, agree that opportunities remain, adding that “the recent share price falls should have limited economic impact and so do not affect our medium term outlook for individual companies”.

However, the managers are wary of the Chinese government’s intervention in the markets.

“We do not like the Chinese government’s reaction to the equity market falls, which has destroyed some of our confidence in their pro-market reforms,” say Williams and Chan. “However, we do not think that these regressive steps alone are damaging enough to threaten the success of the long-term transitional project; it is important to bear in mind that over the previous three years we believed they had not put a foot wrong in their progress.”