For Australia, the plunging Chinese stock market will have a little direct impact, but the slumping economy will.

The falling Chinese stock market and the attempts by the Chinese government to arrest the decline. As generally happens with such things, the day after the writing of the gloom, the main China stock market in Shanghai recorded a 4.5% jump and was followed the day after by another 2.4% rise.

It would be nice if the end of the story was the commentator gets his face covered in egg, everyone breathes a sigh of relief, goes back to waiting for a commentator to once again get egg on his face.

The near 23% fall in the index over the past seven days is the biggest weekly fall since 1996 and dwarfs the 12.8% weekly fall that occurred in July. And as often happens, the rest of the world’s stock exchanges followed. The London stock exchange fell 7.4% in two days before slightly recovering, the Dow Jones index in New York fell 9.7% in four days, before recovering 4% today.

Here in Australia, the All Ordinaries index fell 4% on Monday before recovering 2.6% on Tuesday and a further 0.6% on Wednesday.

In July, the Chinese authorities tried to stem the bleeding by halting trading on half of the stocks, preventing short-selling whereby traders buy options on stocks in the future at a lower price than they currently are selling for in effect betting their price will fall, and also getting the state-owned wealth fund to start buying shares.

And as often happens, the rest of the world’s stock exchanges followed. The London stock exchange fell 7.4% in two days before slightly recovering, the Dow Jones index in New York fell 9.7% in four days, before recovering 4% today.

Here in Australia, the All Ordinaries index fell 4% on Monday before recovering 2.6% on Tuesday and a further 0.6% on Wednesday.

In July, the Chinese authorities tried to stem the bleeding by halting trading on half of the stocks, preventing short-selling whereby traders buy options on stocks in the future at a lower price than they currently are selling for in effect betting their price will fall, and also getting the state-owned wealth fund to start buying shares.

This time around the sense is not so much that the market needs to be assisted, as it is the Chinese economy that needs help.

Reflecting the concerns of investors around the world that China’s economy is slowing by more than anticipated, the Peoples Bank of China on Tuesday cut the benchmark lending rate by 0.25 percentage points to 4.6%:  The PBoC also lowered the required reserve ratio for banks to 18%. This followed a lowering of the RRR in April. The relaxing of the RRR essentially allows Chinese banks to lend more and together with the lowering of the interest rates Beijing hopes to stimulate the economy.

It did little to calm the investor’s nerves. On Wednesday the Shanghai composite index went on a wild ride. At one point it was down as much as 3.2% before rising 4.2% on the back of state-owned banks, before finishing the day down 1.3%.

The fall being experienced in China over the past three months is sharper, but not as severe as that which occurred during the GFC. 

That doesn’t happen when investors are clamoring to get into the Australian economy. The reality is China’s stock market has fallen because growth in the overall Chinese economy is falling and a stock market and an economy can only stay disparate for so long.

The impact of the Chinese stock market on Australia will not be great aside from impacts on our stock market but the slowing Chinese economy and the demand for goods and services from Australia will continue to drag on our own economic growth. It’s just a matter of time to know how this will change.

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