China Stock Crash: Commodity Currency Impacts - Orbex Forex Trading Blog

China Stock Crash: Commodity Currency Impacts – Orbex Forex Trading Blog

Time Stamp: February 6, 2024 6:08 AM
Source Node: 2470914

The China stock market has lost over $7 trillion in value in the last year, a shocking amount even for the second largest economy in the world. It’s widely understood that if the stock market is falling, the underlying economy is in trouble. And there have been many reasons for investors to be disappointed over the last year.

What is even more concerning is that signs of trouble keep popping up, as traders wonder just how far down the bottom is. Foreign investors have been pulling cash out of the china stock market in record numbers. For a while, the government was seen as hesitant and complacent with the decline in asset valuations. Finally, in recent days, it seems that the stock market rout is being taken more seriously by the central government. But all of this leaves Forex traders with an important question:

What About Commodity Currencies?

China is the largest importer of raw materials, which makes commodity exporting economies vulnerable to a potential economic crash in China. The Asian giant managed to grow even with the pandemic, and hasn’t seen a recession since before the start of the current century. Analysts aren’t expecting the situation in China to lead to a recession (at least, it’s not as likely as expectations of a recession in the US). But, if it did, there is little precedent within the current market dynamics to guess how such a scenario would play out.

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But, even a significant slowdown in China’s economy can be a problem. And not just commodity currencies like the Aussie and CAD, which rely on Chinese buying keeping up commodity prices. China is Japan’s largest export destination, and the already “sick man of Europe” Germany relies heavily on machine exports to China. It should be no surprise that the Chinese government stepping in to prop up the stock market is seen as a relief around the world. But it still leaves the concern that such an intervention was needed in the first place.

Trying to Right the Boat

After the Shanghai Composite index fell 6% in a single week, it was reported that Chinese President Xi will discuss the china stock market with financial regulators. This came after a flurry of measures meant to prop up the market have not yielded substantial results. Those include banning short selling, and the country’s sovereign wealth fund increasing purchases of ETFs. There are still rumors that the Chinese government is considering a $278B rescue package for the stock market.

There has been a divergence in the data lately, with the big, state-owned enterprises facing larger headwinds than the smaller, export-driven ones. This is seen in the recent PMIs, where the official NBS measure has been in contraction while the private Caixin one in expansion.

Where Things are Headed

This is an unusual situation, as it’s expected that government-owned companies would get the lion’s share of fiscal support. This comes from the recent Services PMI survey that showed businesses were cutting prices in an effort to regain customers, as consumer demand continues to weaken. At best, China’s economic growth for the moment remains spotty, which could keep pressure on major export economies.

Further support for that notion could come with the release of China CPI figures on Thursday, which are expected to show the Asian giant will fall further into deflation. Typically, that’s a sign of a decelerating economy, and if there isn’t an improvement in the price dynamics, it could increase pressure on Chinese stocks, and by extension, commodity currencies. China headline annual inflation is expected to fall to -0.4% from -0.3% prior.

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