China’s stock markets show recovery signs while EU is closely watching in anticipation of the €10bn investment

Chinese Premier, Li Keqiang and the President of the European Commission, Jean-Claude Juncker at the China-EU Business Summit on 29 June 2015 at Egmont Palace, Brussels (BUSINESSEUROPE, 29/06/2015)

Chinese Premier, Li Keqiang and the President of the European Commission, Jean-Claude Juncker at the China-EU Business Summit on 29 June 2015 at Egmont Palace, Brussels (BUSINESSEUROPE, 29/06/2015)

The recent turbulence of the Chinese stock exchange has caused great concerns not only to the second biggest world economy but also to the European Union (EU) as a whole. Junker’s European Commission (EC) is anxiously waiting for China to invest in the EU given the fact that not long ago the Chinese Premier promised to substantially help  the EU’s infrastructure fund with 10 billion euros.

The fall that the Chinese major stock indices experienced last Monday was one of the most severe one-day losses in the last eight years. However, Chinese regulators and the central bank of China intervened by injecting cash to the money market which arrested the worsening of the situation.

Even if Chinese stocks fell more than 8% last Monday, they will probably not impose great impact on the real economy since there is a small percentage of stock ownership by households.

Stock bounce was somewhat expected

Shanghai Shenzhen CSI 300 Index which replicates the performance of 300 stocks traded in the Shanghai and Shenzhen stock exchanges experienced a tremendous 8,55% drop on July 27 closing at 3819,086. CSI 300 showed stabilising signs ending at 3815,412 at yesterday’s session mainly due to the government’s actions to buy shares and ease its monetary policy even more.

Furthermore, Shanghai Stock Exchange Composite Index indicates the performance of all stocks traded at the Shanghai Stock Exchange including A (shares of the Renminbi currency) and B shares (shares traded in foreign currencies). This index’s decrease was slightly under 8,5% at the end of last Monday’s session. However, the trend revealed a small rise two days later, on Wednesday, when the Index closed at 3789,168, just 2,25 % above yesterday’s session.

All in all, the Chinese stock market expressed by its main Indices had shown a very high increase since last March which was not keeping up with the real economy. Thus, it now seems to be autocorrecting showing the steadily increasing rate (1,7% GDP increase QoQ in Q2) of the Chinese economy.

Why Chinese stocks are going down?

The aforementioned event was attributed to the fact that the Chinese authorities were testing the effect of withdrawing part of the support that they have at their disposal. More specifically, three people working at the banking sector stated to Reuters that “the state-run margin lender had returned ahead of schedule some of the funds it borrowed from commercial banks to stabilise the stock market”. What is more, Tim Condon, the head of research Asia for ING Bank in Singapore mentioned that “the authorities picked an inopportune time to float a trial balloon about scaling back market support operations.”

EU awaits China’s investments

This “worrying” situation has not left Europe untouched. The EU is closely watching the prospects of the second biggest economy in the world and is waiting China to keep its promises made at the Summit, which took place in Brussels on June 29, to invest 10 billion euros increasing its growth opportunities in the Old Continent.

The latter will certainly boost the EU investments changing dramatically the investment context of the bloc which has suffered great losses since 2008 when the financial crisis began.

All in all, there is little doubt that China is going to continue growing despite the stock markets outbursts and it remains to be seen whether China will be a substantial investment contributor of the EU; adding to Junker’s ambitious plan. Of course, for the latter to happen collaboration between the two major trade partners needs to be intensified, cutting red tape and deploying fast the successful plan that will bridge the investment flaw between Beijing and Brussels.

The European Sting will be closely covering the matter and reporting on the effect of the China-EU relationship to the European and global economies.

Follow Chris on Twitter @CAnyfantis

You can interestingly watch below the stimulating speeches of the Chinese Premier, Li Keqiang and the President of the European Commission, Jean-Claude Juncker at the China-EU Business Summit 2015 last month in Brussels, where the Sting was present.

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