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Chinese Equity Market Impact – Shipping

July 8, 2015
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China’s stock market crisis is winding its way through small capitalized stocks of the Chinese equity markets. As the overall Chinese equity markets have imploded over the course of the past few weeks, the impact has not only been felt by investors, who represent the wealthier contingent of Chinese society, but the concern is that is will begin to impact other areas of Chinese business activity and international markets. The full impact of the decline in the Chinese equity market may yet to have been fully flushed through the system as many of these stocks are restricted by limit down daily movements or have had trading suspended. Market declines may continue to occur until the daily limit down movements and suspensions have normalized. At this point, the full impact of the market decline will be realized.

Impact of Market Decline: 

The Chinese government has been instituting controls to slow the impact of the decline in the small cap market. Since the decline has basically been limited among a small portion of Chinese investors as foreign investors have for the most part been invested in large capitalization issues, less impacted by the declines on a relative basis, the greatest impact appears to be market confidence/perception and the concern is its impact will lead to domestic and global contagion. The decline in the Chinese equity markets has increased global volatility and reduced the likelihood of a interest rate move by the U.S. Federal Reserve.

One may suspect that Chinese consumer confidence may suffer, causing higher end consumer markets to slow. In the commodity markets, the impact of the decline has been significant. Clearly, iron ore prices have reached the lows of 2009 and price of the oil market is off substantially from recent peaks.

Chinese Commodity Market Price Declines: – 

-Dalian iron ore:        -16.2% MTD, -29.5% YTD
-Shanghai steel rebar: -9.0% MTD; -25.9% YTD
-Shanghai copper:       -8.7% MTD, -13.8% YTD

A further economic slowdown of the Chinese juggernaut can be expected to have an impact on global shipping markets. It is difficult to determine if all of these impacts to the shipping markets will be negative. In the case of iron ore, shipping markets may see a slowdown in the immediacy of demand causes rates to fall from recent highs. In the case of oil, its fall may continue to cause rates to moderate, but until a slowdown in Middle East production occurs, shipping demand may buttress shipping rates. Whether this will impact the container market is debatable as the container market is more dependent on US demand and less of an impact caused by the Chinese equity markets. 

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