Global equities have seen their sharpest falls since the 2008 financial crisis as extreme volatility in the Chinese stock market stoked fears of a China-led global economic slowdown. The falls came after the Shanghai Composite dropped an incredible 8.5% in a session the official Chinese news agency dubbed “Black Monday”. At the centre of this volatility are concerns that China’s growth is slowing below acceptable levels. Indeed, such worries have intensified since Beijing unexpectedly devalued the country’s currency a little less than two weeks ago.
The state of the Chinese economy matters as it is now comparable in size to the US and makes up 15% of the global economy. Moreover, it has contributed half of global growth over recent years. Slowing growth in China therefore means slower global growth and the fear is that this could lead to another “2008 moment”. Such fears look misplaced, though. First, China has a large current account surplus when commodities are excluded – as such its slowdown will continue to be painful for commodity exporters (the price of oil has fallen to a six year low and average commodity prices are trading at their lowest levels this century) but should not force the global economy into recession. Second, China’s credit bubble has been fuelled by domestic savings, meaning a financial crisis in China does not mechanically imply a global crisis.
The FTSE 100 has now fallen approximately 15% since its peak in April. Such falls are painful in the short term but are somewhat irrelevant to long term investors: dividend income has not dropped since April and the world will no doubt keep turning, advancing and growing in the long term. The nature of the stock market is that large drawdowns happen sporadically, but history ultimately shows that these are good times to add to long term investments rather than sell in panic.