The stock market terminals may be showing red, but the mood among investors worldwide is clearly blue. By mid-morning in London, the FTSE 100, CAC 40, DAX Hang Seng, Nikkei and, of course, Shanghai Composite indices were all down between 1% and 4% - not exactly the panic of the last couple of weeks, but fairly miserable nonetheless.
The most obvious cause is a set of manufacturing data out of China. The official Purchasing Managers’ Index (PMI) fell to 49.7 for August, the lowest level for three years and a sign that Chinese industrial production is (just) in contraction. But is that really enough to wipe billions off the value of the world’s biggest companies?
Investors are plagued by two fears about China. The first is that the evident slowdown in its economy and the far more dramatic collapse in its equity markets (the Shanghai Composite has lost 40% since June) are in fact harbingers of a much more severe contraction to come. A ‘hard landing’ in China could drag first Asia then the rest of the world back into recession.
However, the evidence isn’t really enough to justify that, at least not yet. Yes, heavy industrial production and the mining sector are contracting (profits in the latter were down two thirds according to the latest official data), but there are plenty of other, consumer demand-driven sectors that are doing just fine. Besides, at 7%, the Chinese economy is still growing far faster than Europe’s, isn’t it?
This is where the second fear comes in, the fear of the unknown. The west has never exactly taken Chinese official figures as gospel (an independent version of the PMI by Caixin/Markit gave a distinctly less healthy score 47.3, while many economists estimate Chinese growth to be more like 4%), but it did have a certain faith in the state’s ability to manage the economy.
The Chinese authorities’ failure to prevent the markets falling and their outrageous, panicked arrests of journalists and hedge fund managers for ‘rumour-mongering’ has eroded that faith. Investors in Europe and America don’t know how exactly bad things really are over there, but they do increasingly know that the Chinese Communist Party is subject to the same tidal market forces that everyone else is.
Until it becomes clear how severe China’s slowdown is (a fall to 4 or 5% isn’t really much cause for concern; a fall to negative 3% would be), this uncertainty will surely continue to have a depressing effect on western investors.