Chinese economy building to 'crisis point'

Craigs Investment Partners analyst Mark Lister says the Chinese equities market is completely overhyped and speculation in is beginning to unwind. Photo: AFP.

Chinese shares are plunging again today, suggesting a raft of Government-introduced measures aimed at halting the sell-off is failing to have the desired effect.

The Shanghai Composite Index was down 2.2 per cent in early trading this afternoon, while the Shenzhen market was down more than 4 per cent.

While the world watches Greece, New Zealand analysts are eyeing up China, where sharemarket volatility and a slowing economy are starting to have an effect back home.

China's economy has been in slowdown mode for the last 18 months, however its sharemarket has rocketed in the last few months, hitting a seven year high on June 12 up 150 per cent from the year before. Since then however it has dropped 30 per cent in less than a month as the market hype wears off and investors start to pull back.

"China is becoming the single biggest concern for markets," said Evan Lucas, market strategist at IG.

"Yes, Greece is going to be a talking point as it clearly has a banking crisis and Grexit is a real possibility," he said.

"However, the run on in Chinese equities is a global risk and a conundrum that is building to a crisis point."

The market inflation is being attributed to monetary easing and a downturn in China's property market which has been pushing investors towards the sharemarket, however Craigs Investment Partners analyst Mark Lister said this market was now starting to deflate.

"We've seen such a boom in new retail share broking accounts and margin loans, so they're effectively borrowing money to invest in Chinese shares and ride the wave of strength that they're seeing," Lister said.

"So the market is completely overhyped and there's a big dose of speculation in there and now we're seeing that unwind."

Chinese government and financial authorities had since been trying to prop up the market, with the Financial Times reporting brokerages had promised not to sell shares until the Shanghai market had recovered 4,500 points, and having to deposit NZ$28.5 billion into a stabilisation fund. All new share issues were also suspended.

"It's interesting, authorities over there are doing everything in their power to keep the bubble going - changing rules to let people use their house as collateral, and you've got all of these brokers now committing to sharefund to try and prop things up so all of that is a little bit artificial in my view," Lister said.

On Sunday China's securities regulator said the central bank would lend from its own balance sheet to support the stock market, one of the most significant efforts yet to halt the declining market.

Lister said the volatile sharemarket was not a major concern for New Zealand, however its slowing economy was, with this already being reflected in business confidence surveys and the Reserve Bank having to cut rates, as well as in New Zealand's commodity sector.

"We're seeing it in terms of dairy prices, that's part of the reason why dairy prices are languishing - not the only reason but it is part of that story," Lister said.

"The slowdown in china is definitely the key driver of why the Australian economy is doing it tough because they're even more exposed to China than we are."

Lister said the impact was doubled with New Zealand being impacted by China as well as Australia.

"The Chinese economy is one of my biggest worries over the next couple of years when it comes to risks to New Zealand and the global environment - the slowing Chinese economy is a big deal," he said.

China is New Zealand's biggest export market with around 19 per cent of exports ending up there.