China has been knocked from its throne as the world’s No. 2 stock market — and it’s all thanks to anxieties over trade friction with the United States, according to analysts.
Bloomberg reports that a Thursday slump in China’s stock market left the country’s equities worth $6.09 trillion.
That’s less than Japan, where the equities are valued at $6.31 trillion. The United States is No. 1 with $31 trillion.
China’s stock market had previously replaced Japan’s market in the No. 2 spot in 2014. In 2015, China saw the value of its equities rise to $10 trillion.
However, both the market and Chinese currency have been on a downward trend as of late, in part thanks to China’s trade dispute with the Trump administration.
“Losing the ranking to Japan is the damage caused by the trade war,” Banny Lam, head of research at Hong Kong’s CEB International Investment Corp., told Bloomberg.
“The Japan equity gauge is relatively more stable around the current level, but China’s market cap has slumped from its peak this year.”
“The market will likely continue to hover at low levels for the next couple of months,” Linus Yip, a Hong Kong-based strategist at First Shanghai Securities Ltd., told Bloomberg.
“But there’s still a chance that China’s stock market will recover with total capitalization ascending to the world’s No. 2 place again. After all, the economic fundamentals are still stable and growth momentum will resume after a short-term downturn.”
Perhaps most significantly, China’s position as the world’s No. 2 stock market was a propaganda boost for the regime, the same way it was when China passed Japan in GDP back in 2010. It was a sign that China had “arrived,” so to speak, and that the world needed to pay attention.
“This has enormous significance,” Nicholas R. Lardy, an economist at the Peterson Institute for International Economics, said when China became the world’s No. 2 economy, according to The New York Times.
“It reconfirms what’s been happening for the better part of a decade: China has been eclipsing Japan economically. For everyone in China’s region, they’re now the biggest trading partner rather than the U.S. or Japan.”
China is still the world’s No. 2 economy, and that isn’t going to change. Data from the International Monetary Fund puts the country’s economy at $14 trillion and growing rapidly, well more than Japan’s $5.3 trillion. China’s economic rise, however, hasn’t been followed with a concomitant rise in the price of their equities.
“Losing the number two spot is a reminder that China’s role in global financial markets — while large — still doesn’t match its economic might,” Bloomberg reported.
“Policy makers have pledged to open areas such as investment limits on industries from banking to agriculture, but foreign ownership of equities and bonds remains low.”
And on the GDP side, if China wants to get into a trade war with the United States, its rapid growth could slow dramatically.
China’s economy has already been predicted to grow half a percentage point slower than last year due to various concerns regarding lending, pollution and local government spending. A trade war could further erode growth in the country.
And then there’s a very unfortunate fact for Beijing: China imports a lot less from the United States than the United States imports from China, which means there’s a lot more the Trump administration can put tariffs on if trade disputes continue. That’s something that’s bound to make Beijing just a little bit queasy.
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