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Expect More Volatility, Uncertainty As China Reforms Continue

Business, China, Company Strategy, Economics
By John Richardson on 09-Jul-2015

Shanghai Composite

By John Richardson

MOST Asian stock markets took a hammering on Wednesday because of the sharp decline in Chinese equities.

So did commodity markets, as my colleague Nigel Davis pointed out in this Insight article when he wrote:

Copper prices hit new 2015 lows, iron ore futures were down sharply.

Plastics futures prices plunged on the Dalian Commodity Exchange on Wednesday while spot domestic China polyethylene and polypropylene prices were down more than 3% as traders and distributors rushed to liquidate cargoes, ICIS reported. Demand is on a knife edge although there had been some hope of better demand in July and August.

A fall in September linear low density polyethylene (LLDPE) futures on the Dalian on Wednesday morning of 5.98% led to a temporary halt in trading because the maximum daily loss had been reached. Monoethylene glycol (MEG) prices were badly hit.

Sure, all these markets might bounce back again if there is a recovery in China’s stock markets, but in the final analysis, any such recovery will not make that much of a long-term difference.

The reason is that China’s economic reforms mean longer term lower demand growth for iron ore, for copper and for chemicals and polymers.

And as these reforms continue, there is every chance that China will move much-closer to self- sufficiency in basic chemicals and polymers.

Equally, the transition to a consumer-led from an investment-led economic growth model is going to be a slow and difficult process. It was always wrong to believe that the boom in stock markets was a way of achieving this transition very quickly.

What the stock market chaos in China does illustrate, though, is that the economic reform process is highly uncertain.

Beijing took a “policy punt” by encouraging the rise in equities. The idea was to compensate investors for the real-estate slump by pushing shares higher, whilst also boosting the financial health of companies.

Other policy initiatives might go similarly go wrong. Quite often, it could thus be a case of “one step forward and two steps back”.