On Monday 24 August, China – the world’s second largest economy – saw its stock market plummet by 16 per cent with share prices estimated to have lost $US 8trillion in value. The People’s Bank of China responded by cutting its lending rate for the fifth time this year to 4.6 per cent (down 0.25 percentage points), which has resulted in some stabilisation. The knock on effect has seen falls in other Asian and US markets. The European markets are down by 0.4 per cent after strong rallying yesterday.
When the UK, Europe and the US hit its financial crisis in 2007/2008, demand for exports from China significantly fell. To protect its market, China embarked on a credit-based investment boom of its own, or in some people’s opinion a bubble. China’s debt has quadrupled since 2007 to $US 28trillion. What we are now seeing is the market correction of this boom. Though China’s economy is slowing down, it is not hitting a wall.
However, China’s imports are likely to be the most worrying effect on the global economy. It imports 14.4 per cent of the world’s oil (Saudi Arabia and Russia to be affected), 57.7 per cent iron or (Australia and Brazil), 31 per cent copper ore (Chile and Peru) and 57.7 per cent soya beans (US and Brazil).
Like the Chinese stock market and Shanghai index are different from the West in that more than three-quarters is comprised of individuals rather than corporations. The Chinese residential market also differs as it has one of the world’s largest owner-occupier markets. The majority of those who live in densely populated areas own their own homes. The decrease in the central bank’s interest rate means cheaper borrowing for other banks and consequently these banks can lend to consumers, which has a positive impact on spending and general economic liquidity.
Undoubtedly, there may be some short-term shock value but with Japan’s Mikkeu, South Korea’s Kospi, London’s FTSE, major markets in France and Germany, and even Australia’s ASX/S&P bouncing back on Tuesday, it’s expected to be a short-lived concern. However, these markets will probably continue to ‘gyrate’ until mid- September.
In the medium and long-term, there is likely to be a positive impact on international residential sales in primary investment locations around the world, namely, Australia, London and US (major markets). This is mainly because there is still considerable, excess liquidity in China (and globally). This cash ultimately needs to find a home and bricks and mortar is still seen as a safe haven, especially within blue chip markets.
UK Domestic Market Snapshot
- The Bank of England is predicted to delay interest rate hikes until mid-2016 to encourage consumer spending and retain house price values.
- Colliers anticipates London and the South East residential markets to continue attracting interest from local and international investors who seek a stable investment that will appreciate in the medium to long-term, while also potentially producing a rental income.
- A fall in exports to China will mean a surplus in international markets. This means household items such as produce, products and oil (and energy) are likely to be cheaper. With reduced bills, disposable income increases so domestic spending will inevitably increase, too.
- Central Banks such as the Bank of England might be tempted to make money cheaper to also fuel spending and investment. This could mean more plentiful mortgage products.