Workers use computers at their desks inside Tech Temple, a co-working space for start-up companies sponsored by Infinity Ventures Partners, in Beijing. China’s economy expanded 7.4% last year, its weakest since 1990, and growth has slowed further this year, measuring 7.0% in each of the first two quarters.

AFP/Beijing


Asian stocks nosedived yesterday, led by sharp falls in Shanghai as concerns mount over the health of China’s economy; the world’s second largest.
Although Chinese growth, a major engine of global expansion, has been slowing for some time, financial markets have nevertheless tumbled over fears it will decelerate faster than expected.
Here are a series of answers to key questions on the Chinese stock market and the wider economy:
What has China done to try to stop shares falling?
China’s stock market enjoyed a spectacular rally until mid-June when it suffered an even more dramatic decline, slumping more than 30% over a three-week period. Authorities rolled out a range of measures designed to restore confidence but they had only a short-term impact.
The rescue package included “big” investors being barred from selling their stakes, curbs on margin trading, and restrictions on short-selling—when investors bet prices will go lower. The state-backed China Securities Finance Corp also stepped in to buy stocks on behalf of the government.
In the latest measure that failed to impress, authorities at the weekend said the state pension fund would be allowed to invest 30% of its total assets—a trove state media says amounts to $550bn—in shares.
Beijing has also cut interest rates and issued a shock devaluation of its currency of nearly 2% on August 11, causing the yuan to tumble almost 5% over that week. The move will give exporters a boost but also raised fears that China is doing worse than had been thought.
Where next for China’s stock market and currency?
Yesterday’s falls take the Shanghai stock market below its level on July 8, when Beijing stepped in. It is also below its closing level on December 31 last year, meaning it has wiped out all its 2015 gains.
Analysts say shares are likely to go lower still as the plunge in global bourses is blowing back on China in what is effectively a vicious circle.
The yuan is widely expected to weaken further against the US dollar, although the central bank is likely to intervene to prevent steep slides.
Japanese bank Nomura expects the currency, currently around 6.4 yuan to the dollar, to depreciate further to 6.6 by the end of the year.
Why are financial markets so gloomy about the Chinese economy?
-China’s economy expanded 7.4% last year, its weakest since 1990, and growth has slowed further this year, measuring 7.0% in each of the first two quarters.
It is a far faster growth rate than most other major countries, but the yuan move raised suspicions that the state of the economy is worse than officials have revealed.
After three decades of breakneck development, Beijing is trying to pull off a tricky rebalancing of the economy to make growth more consumer-driven and sustainable, but also making sure it does not slow so much that employment growth is severely affected.
Missteps along the way, including allegations it is wasting its reserves on fruitless attempts to support the stock market, also raised doubts over its economic stewardship.
China’s second quarter gross domestic product (GDP) figure exactly met the government’s full-year target of “around” 7%, leading some analysts to question the announcement, which came after several weak indicators. China has long faced accusations that the government massages economic figures during times of slowdown.
Why is slowing growth a problem internationally?
With Europe’s economy weak and the US preparing to raise interest rates, the world has looked to China’s to keep its finances humming and the realisation it can no longer be relied on has caused panic.
As the world’s biggest trader in goods, China’s thirst for raw materials fuels resource sectors around the world, and countries that rely on its appetite have already felt the effects, such as Australia, whose mining boom has ended as demand for iron ore dries up.
With more than 1.3bn potential consumers, China is also a huge market for manufactured goods, and any weakness in demand would be keenly felt by producers, including the many multinationals which have operations in the country.
The shock devaluation of the yuan has hit other emerging market economies, from Turkey to Brazil, whose exports are now comparatively more expensive, and there are fears of a round of copycat depreciations that could see a “currency war” break out.
Many countries are concerned that their exports will now be undercut by China, particularly in sectors that directly compete with it, for example high-tech exporters in South Korea and Taiwan.
Chinese consumers, who account for more than 30% of worldwide luxury spending, will have less purchasing power and there could also be implications for tourism industries that have come to rely on big-spending Chinese visitors.
Why is slowing growth such a problem domestically?
China’s ruling Communist Party is under pressure to deliver improved living standards, lifting more people out of poverty and satisfying the growing middle class, in exchange for acceptance of its rule.
The government needs to maintain a minimum level of economic growth, which some analysts put at 7%, in order to create jobs for millions of people and prevent social unrest.
The turmoil on the stock market also threatens to cause painful losses for tens of millions of “mom and pop” investors, the main force in China’s markets who trade on rumour and speculation and who were ill-prepared for a market bust.
Is the panic justified?
Analysts are mixed on the question. The latest scare came last Friday when a survey indicated that manufacturing activity was at its lowest for more than six years.
“The multi-year low in the PMI (purchasing managers’ index) confirms that the economy is still not on a solid footing and (we) look for a flat growth profile in H2, with continued downside risks,” Barclays Bank said in a research note.
But others said China can still deploy further interest rate cuts and spending measures.
“We continue to believe that sentiment is currently overly downbeat and that policy support will limit the downside risk to economic activity over the course of the next couple of quarters,” Capital Economics said.
Another risk is that market interventions could derail economic reforms and cause the government to fall back on pump-priming instead of pursuing its long-touted aim of shifting to domestic consumption as the driver of more sustainable growth.