This was supposed to be the year when normality returned to the global economic landscape. Growth was looking more established and the legacy of the financial crisis was dimming. The US central bank and the Bank of England looked poised to affirm the recovery by finally starting to raise interest rates after keeping them for years at emergency levels. Even the eurozone, having come close to unraveling once again, by this month appeared to have put the latest Greek crisis behind it.
All that changed on China’s “Black Monday” last week, when the stock market sell-off that had been rumbling along for weeks turned into a rout. A near 9% fall in the main Shanghai Composite index, its biggest one-day drop since 2007, reverberated around global markets, sending other bourses from Sydney to Wall Street tumbling. In London, dramatic moves on the FTSE 100 were reminiscent of the worst days of the last crash.
The worries went well beyond China’s immature stock markets: there were growing signs that the country’s real economy was slowing at an even sharper pace than officials in Beijing had feared, awakening fears that the global economy was headed for a fresh crisis. China’s GDP growth last year of 7.4% was already the slowest for 24 years; it was also the first time this century it had fallen short of the official target. Now there are doubts China can hit this year’s lower target of around 7%. Despite a string of interventions by policymakers, including a shock devaluation of the yuan this month, the world’s growth engine appears to be spluttering.
It is too soon to tell if China’s wobble will spark a new global downturn. By the end of last week, stock markets in Europe had regained their Black Monday losses. But jitters have not gone away as investors, businesses and policymakers brace for more Chinese shockwaves. From the property market to petrol prices, what does the turmoil in China mean for the UK?
At the luxury end of the UK property market there are fears that wealthy Chinese investors burnt in the sell-off will have less to spend in Britain. But so far estate agents report that turmoil at home has only served to increase the attractiveness of property in the UK.
“The Chinese are increasingly focused on diversifying their assets and uncertainty over the performance of the stock market reinforces this. There is anecdotal evidence that Chinese buyers have intensified their interest in ‘safe haven’ global property markets, including London, as a result of the recent stock-market volatility,” says Tom Bill, head of London residential research at Knight Frank.
Rob Weaver at residential crowdfunding platform Property Partner says: “With the recent financial turmoil in China, eyes from the east will focus even more sharply on the capital as a safe haven to park foreign investors’ cash. Financial crises often put London back in the frame.”
For the wider housing market, the prospect of interest rates staying at their record low for longer should support demand and buoy prices, economists have said.
In commercial property little impact was expected from events in China, says Jeff Matsu, senior economist at the Royal Institution of Chartered Surveyors. “You have to look through this and stay the course. If you get distracted by movements in markets that can be dangerous as an investor.”
Shares and pensions
UK shares, like all European markets, have been buffeted by the dramatic swings on China’s exchanges. Almost £74bn was wiped off the FTSE 100 index on its worst day last week, as it tumbled 4.7% following the new Black Monday.
But by the end of the week it had recovered the losses, buoyed by brighter economic news from the US and more emergency measures by China’s policymakers to shore up their rattled markets. Still, over August as a whole the index suffered its worst monthly loss since May 2012, down 6.7%. Financial experts advise pension savers with money in shares not to worry about short-term volatility. The more important question is what the longer-term returns look like.
There are two big factors at play in the FTSE’s ups and downs. First, there is the level of risk investors attach to shares in general. As sharp falls in Chinese stocks shook investors’ nerves around the world last week, they ditched those assets seen as riskier, including shares, in favour of so-called “havens” like gold and government bonds. But most analysts think equities are likely to remain an attractive investment as the global economy continues to recover, albeit slowly. Equities will also probably remain attractive as long as yields on assets such as bonds remain low and commodity prices hover around multi-year lows.
The second factor weighing on the FTSE is the importance of mining and energy company shares in the index. They suffer when worries rise about Chinese demand for commodities such as iron ore, oil and copper. Shares in miners Glencore and Anglo American hit fresh all-time lows last week. If concerns intensify over China’s economic slowdown and wider global growth, these sectors are likely to suffer further losses and keep the wider FTSE under pressure.
The debate has been heating up over when policymakers at the Bank of England will opt to lift interest rates in the UK from their record low of 0.5%, where they have been for more than six years. The latest turmoil on Chinese markets and worries about the global economic outlook provide further food for thought for the nine members of the Bank’s monetary policy committee.
Last month, Bank governor Mark Carney indicated that the turn of the year could bring the first UK rate rise since the global financial crisis and, speaking in Jackson Hole on Saturday, Carney said: “Developments in China are unlikely to change the process of rate increases from limited and gradual to infinitesimal and inert.”
But, with the growth outlook less certain and inflation kept low by cheaper commodities, the Bank and the Fed may well hold off, economists reckon. Next May looks the most likely time for a UK rate rise, says Andrew Goodwin, at the consultancy Oxford Economics. But there are plenty of risks that could push it back still further, most notably stemming from China.
“A hard landing for China could lead to much lower growth and inflation in the UK which, in turn, could potentially delay the first rate hike until 2017 or beyond,” says Goodwin.
In the US, traders have also scrambled to scale down their rate-rise bets after a key member of the US central bank’s rate-setting committee appeared to play down the chances of a move next month. Bill Dudley, the president of the New York Federal Reserve, said a September rise was now “less compelling” than it had been just a few weeks ago.
With confidence shaky in the UK’s longstanding European trading partners, businesses have been looking to emerging economies, particularly China, for new opportunities.
The British Chambers of Commerce has warned that the growing trade links mean uncertainty in China will be felt in some way in the UK.
Furthermore, many British companies in supply chains could also be affected if China’s trade with the eurozone is hit, says Adam Marshall, the group’s executive director of policy.
“Yet UK firms doing business with China should hold their nerve. China remains rich in opportunities for UK exporters, both in the short and longer term,” Marshall adds.
For now, China remains a relatively small part of Britain’s export market, notes John Hawksworth, chief economist at the consultancy PwC. “Unless things get a lot worse in China, the impact on the real economy in the UK should not be that great.
“China accounts for less than 5% of UK exports, even including Hong Kong, so the direct trade effects of a slowdown there will be limited outside a few sectors such as luxury cars and consumer goods.” But after the manufacturing sector contracted in the latest quarter, businesses themselves appear more worried. Almost half – 47% – of companies polled by manufacturer’s organisation EEF said they were concerned about a possible sharp slowdown in China. That comes on top of lingering fears about Greece leaving the eurozone, with only 22% of the 284 manufacturers surveyed saying they were not concerned about a re-escalation of the crisis in Greece.
“For some sectors in manufacturing, the slowdown in China is not a new story. We’ve seen exports of vehicles to China, for example, on the slide since the end of last year,” says EEF chief economist Lee Hopley.
But the worries go beyond exports and the manufacturing supply chain, she says. “The more widespread impact, at least in the near term, is likely to be the knock to already-delicate confidence levels.”
Oil prices have tumbled over the last year and that is boosting household budgets for many Britons. China is the world’s biggest energy consumer, so signs of an economic slowdown helped push down the oil price last week: at one point benchmark Brent crude was below $43 per barrel compared with a peak of $115 last summer.
Some of that fall is feeding through to fuel prices and should help keep inflation low in the UK. Inflation has hovered around zero for most of this year while average wages are growing by more than 2%, leaving workers better off in real terms. That pattern looks set to continue with low oil prices and it should bolster consumer spending, the main driver of Britain’s economic growth.
“A lower oil price will boost household budgets in the UK, Europe and the US, which should feed through into spending. The $70 fall in the oil price over the last year puts $6bn more into the pockets of oil consumers each day – a level of economic stimulus even central bankers would be proud to notch up,” says Laith Khalaf, senior analyst at stockbroker Hargreaves Lansdown.
The depreciation of the Chinese currency will also help dampen British inflation through cheaper imports. Taking services and goods together, China was the second-biggest source of imports to the UK last year, behind the US.
Aside from the yuan weakening against the pound, there have been other effects on sterling as investors reassess the outlook for UK interest rates against the backdrop of turbulent global stock markets.
The prospect of borrowing costs staying lower for longer has pushed the pound down against the US dollar. Last week sterling fell to its lowest level against the dollar for more than a month. The pound also weakened against the euro for the fourth week running.
Those moves bring a little respite for UK exporters, who say they have been struggling because the strong pound makes their goods more expensive to overseas buyers. For UK holidaymakers, however, it means that those who booked their holidays late in the summer have found that their overseas spending money does not stretch quite so far as it did for those who headed abroad in July.
Growing market Between 1993 and 2013 China’s share of global GDP rose from 1.7% to 12.2%, in contrast to Europe and America, the UK’s traditional trading partners, whose share of GDP fell over the same period. Exports to China have risen over the last decade and now account for 3.2% of UK exports – the sixth biggest destination for UK businesses. China is the largest foreign market for British cars.
Imports grow Chinese imports to the UK rose even faster, to 7% of UK imports in 2014, making China the second largest import partner after America.
But they outstrip exports Due to imports growing faster than exports, the UK’s goods trade deficit with China has widened to stand at £22.1bn in 2014, second only to the gap with Germany.
Direct investment Foreign direct investment (FDI) between the UK and China has also grown. UK investments held by Chinese citizens rose from £119m in 2004 to £950m in 2013, according to the Office for National Statistics. China is also an increasingly important destination for UK investment. UK citizens held £6bn of FDI assets in China in 2013 – more than treble the amount in 2004.
UK in China
There are far more UK businesses operating in China than Chinese businesses in the UK, according to the Office for National Statistics. In 2012 there were 61 Chinese-owned businesses in the UK, compared with 654 UK-owned companies operating in China. That accounts for 2.8% of UK owned enterprises abroad.
Biggest export Motor vehicles top the list of UK exports to China, the world’s biggest car market and the largest single market for British-built cars after the UK. Last year, more than 137,000 UK-built cars were exported to China, an increase of almost 15% on 2013, according to the Society of Motor Manufacturers and Traders (SMMT).