Crikey spoke to a group of financial experts this morning about the drop in the Chinese sharemarket, what caused it, and what its likely effects will be on Australian stocks. Should we be readying for a rough landing, or just returning to our seats momentarily until the turbulence passes?

China’s stock market is very very volatile market. It’s had huge increases. It was due for a correction. It’s certainly true that there’s anxiety about US pressure for further renminbi appreciation, but we’ve seen that despite the appreciation over the last eighteen months Chinese exports have done very well. A further appreciation will not be difficult for China. It’s not going to bring about a collapse. There is no threat to continued firm output growth in China. As for the US share price fall, it coincides with quite good housing sales numbers and higher consumer confidence, so again I think it’s a correction rather than a fundamental reversal. The Australian market is also correcting, which, given the accelerating gains of recent weeks, is no bad thing. — John Edwards, Chief Economist HSBC Australia and New Zealand

What’s really interesting about this is that ten years ago nobody would have cared if the Shanghai market fell. To that extent, it’s very very important. Maybe this is the way it’s going to be. At one time it would have been Wall Street or Japan. Now it’s Shanghai. As for the Australian impact, our market has risen by around 10% since early January and we had been anticipating a pullback. Last year that happened in May. This year it’s much earlier. This morning, there are some sharp falls, up to 5% for BHP, for example. We expect that in the next month or so that the market could come back by around 10%. Right now, the biggest online brokerage in Australia, CommSec, is jammed, which goes to show just how many people are affected here. Standing back a bit – and this is important – the property market will now start looking more attractive to many people. We already know that rents are going up… this will push rents even higher. James Kirby, editor of The Eureka Report

This is a reminder of the growing importance of China to the international financial system. Certainly the Chinese authorities have been moving to quell the growing bubble in the sharemarket, a concern that is in part borne out of the risks associated with the bubble bursting and the widening division between the rich and poor. There will be a significant echo in the Australian market, but that should correct itself when people realise this doesn’t mean anything about the health of the Chinese economy and won’t affect China’s demand for commodities. — Saul Eslake, ANZ Chief Economist

This has really been a technical correction caused by the government introducing measures for improving the sharemarket in China. People need to understand how underdeveloped that market is and how much further the prudential regulations have to go for that market to function properly. In the medium to long term this will benefit the functioning of the Chinese market by improving access for retails investors, whose presence has a stabilizing effect in the market. It will have a short term affect on the Australian market. The mining companies might suffer in the short term, but whatever value they lose will be returned when people realise it doesn’t reflect a weakening of the Chinese economy. — Amy Austin, Head of International Economics and China expert at ANZ

There’s a classic knee-jerk reaction here – the US is off so we’re off too. The US market had strong start to the year, but its last major correction was in May-June last year, so its market was overdue for a fall. To put it in context for China, their sharemarket grew by 120% last year, and this is a 9% fall. Meanwhile, our market has risen 10% in eight weeks – those are huge gains in a short time. I don’t see it as a start of a bear market. It could certainly go on for a few days or weeks, but the fundamentals are good. In Paul Keating’s words, this is the correction we had to have. — Shane Oliver, Head of Investment Strategy and Chief Economist at AMP.

I know absolutely nothing about Chinese stocks and I have proved this over a number of years by attempting to trade them. But I know people who know about Chinese stocks and they tell me that before this correction, the Chinese Shanghai Share Indexes had risen by early this week to a level some three times as high as in early 2006. It was clear that they were likely to fall. Now that that fall has begun, it is likely that we’ll see a technical correction in Chinese stocks of  25%-30% over the next six weeks. If this downward pressure on Chinese stocks is the cause of the downward pressure on our own stocks, then we might expect downward pressure on our own market for a period of four to six weeks, after which it should recover before moving to higher levels. — Michael Knox, Director of Strategy and Chief Economist at ABN AMRO Morgans.

The Shanghai stock market is one of the world’s wilder and ropier exchanges. It matters to the gamblers who play that casino, but it doesn’t really matter much to anyone else – until it somehow becomes an excuse for an international stock market correction. There are some alarmist headlines around the internet and several outrageous claims – “the largest unwinding in the Shanghai Composite Index since 1997 leaves investors questioning the sustainability of stock gains everywhere” – but the calmer heads are immediately seeing this dip as a buying opportunity in the relatively sane markets. The couple of hundred points that came off the Australian all ordinaries index first this morning was just what canny investors had been wanting to see. Shanghai is just an excuse for a correction that the market was already looking for. CNNMoney was carrying a quote from a Chinese analyst saying a market fall like this one looks abnormal. No, a market that rose a very speculative 130% last year and 14% in the first two months of this year is abnormal – a 9% plunge after that is quite normal. And more importantly, if the trigger for Shanghai’s dive proves correct, that Beijing wants to cool the casino, it’s actually good news for the Australian market. Just like the comrades touching the monetary brakes occasionally, everything that helps makes the China story more sustainable is a positive for us. — Michael Pascoe

Peter Fray

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