Summary
Since our chart on Chinese exchange rates last week, the global economic press has shifted focus from the currency to the stock markets. A big drop on Monday was prompted around the world by further falls in the Chinese stock market. The far bigger issue is reflected by what is happening to commodity prices.
What does the chart show?
The chart shows five stock market indices (measures of the prices of stocks in a selected group of companies), all rebased so that the 14th of August (the latest peak in the Chinese stock market) is equal to 100 (this makes it easier to compare across different stock markets). The dark blue line is the Shanghai Composite Index, a representative index of Chinese shares. The red line is the FTSE 100, a compilation of the largest 100 stocks in the UK. The green line is the S&P 500, a collection of 500 companies which is said to represent over 70% of all US equity. The light blue line is the FTSE Eurofirst 300, an index of the stocks of the 300 largest European companies. The purple line is the Nikkei 300, a measure of the top 300 companies from the Tokyo Stock Exchange. Finally, the orange line is Bloomberg’s Commodity Index, a measure of the price of a global basket of commodities.
Why is the chart interesting?
The Shanghai Composite Index has fallen by over 20% in the last week, and this prompted a panic in stock markets around the world. Having been fairly steady for the last three months, share prices in the UK, Europe, the US, and Japan all plummeted, making the blip at the beginning of July (a reaction to the Greek debt negotiations) look relatively minor by comparison. Some of those losses are starting to be recovered today, but the panic was unjustified in the first place. The Chinese stock market is of relatively little importance to the overall Chinese economy (far less than in the US, for example), and as with the exchange rate issue, this is largely a correction after a bubble built up earlier in the year.
The Chinese stock market should not have had such a big impact on the rest of the world, but problems in the wider Chinese economy more generally would. A good example of this is the Bloomberg Commodity Index, which has been falling steadily (and has fallen by 5% in the last two weeks), and is currently at a long-term low. Among other things, this reflects weakening demand from China, who are a massive consumer of commodities. This is much more likely to have a negative effect on the global economy than a Chinese stock market crash.