Posted by

Sukhdeep Dhillon

10 Aug 2015

A three-week plunge in the Chinese stock market has knocked approximately 30% off Chinese shares since mid-June. Investors and policymakers around the world have increasingly raised concerns that turmoil in the stock markets will spill into China’s real economy, the second-largest in the world and a huge engine of global growth.

Chinese stock market (daily)

So what has happened to China’s stock markets that were soaring just a few weeks ago?

China’s stock markets hit a seven-year peak in the middle of June as falling borrowing costs enticed investors. The Shanghai stock market alone had surged more than 150% in 12 months. The rise was also fuelled by the loosening of restrictions in the stock market that made it easier for funds to invest and for firms to offer shares to the public for the first time. This led to a record number of businesses being listed on the Shanghai and Shenzhen exchanges in the past six months.

Stocks were beginning to look overvalued at the beginning of the year when the Chinese economy was losing steam. GDP growth rate halved from 14% in 2007 to 7.4% last year, imports had been falling in recent months and exports also eased off, despite government measures to stimulate growth.

As fears grew that the rise in many stocks was unsustainable, the selling started.

Will the UK economy be affected?

China represents 12% of global GDP and a staggering 18% of global manufacturing exports. The health of the country's economy is therefore a huge concern among Western economies and investors.

The unfolding situation in China is likely to create volatility in the financial markets until the end of the year. With this in mind, investors will be looking to ‘China-proof’ their exposure while British businesses will want to see and hear more from the Government and the Bank of England on their plans to support and protect British firms and UK economic growth as a whole.

The British Chambers of Commerce (BCC) 2015 International Trade Survey results show that one third of UK exporters (31%) export to China while a further one in five firms (21%) are on the cusp of exporting and are looking to export to China in the next five years.

The crisis poses a threat to the British economy through a knock-on effect from countries whose economies rely heavily on China. For instance, a number of eurozone economies, notably Germany, are powered by a large amount of exports to China.

On the upside, slowing demand from China for commodities has helped push prices down globally. And the recent drop in oil prices, which has largely benefitted British businesses and consumers, is in part thanks to China's reduced demand.

China is and will remain an important and viable market for a wide range of products and services for British businesses.

To find out more about the latest opportunities in China, visit the Export Britain website.