Caution urged as China stocks fall

(iStock)
(iStock)

Economists say China's jitters are reason for New Zealand to be cautious, but there's no need to panic.

One British bank has been telling its investors to pull out of shares altogether as China's stock market has fallen along with the price of commodities, prompting fears of another Global Financial Crisis, but economists say that's an overreaction.

"I think now is certainly a time for caution but I don't think necessarily we're on the brink of a cataclysm," says Westpac chief economist Dominick Stephens. "China is a massive saver. Serious problems normally emerge in countries with excessive debt."

Royal Bank of Scotland has offered advice to investors: "Sell everything except high-quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small."

But that smacks of panic to at least one economist in New Zealand.

Massey University professor of economics Christoph Schumacher says there's a lot of psychology involved in the stock market.

"Because the economy is slowing down in China, now people are concerned [about whether it is] going to drop even further, then a few people pull out then other people observe this, saying 'oh more people are pulling out I'd better pull out' and this makes the problem possibly bigger than it really is."

The markets are reacting to China's slowing growth and this year the Shanghai index lost 15 percent of its value in six days. Authorities twice closed it. Plus, China is New Zealand's biggest trading partner but its problems are a mixed blessing for us.

"As a commodity producer we're going to suffer, with such cheap oil, milk's going to be cheap, meat, other food products," says Mr Stephens. "New Zealand exports those products [so] that's bad for us. On the other hand cheap oil may be a boon for the tourism sector [and] the lower New Zealand dollar may be a boon for our non-commodity exporters."

New Zealand's economy has long since lost its rockstar status and the second half of last year was flat. The future's bleaker – on a gloom scale of one to ten, it's rising.

"I'd put us at a seven I think," says Mr Stephens. "Now is a time for caution."

Mr Stephens is predicting our growth to slow further this year, but it won't fall over.

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