In order to have a thorough examination of these effects, we should first study the origins of such free-fall in Chinese markets, while keeping in mind the records of prices and market indicators in China. Although Chinese market index experienced a sharp drop of 30% during the first week of the year, but this index had shown a growth of over 100% from the beginning of 2014 up until the first half of 2015, mostly due to an overvaluation of the Chinese market by stock brokers relative to economic strength of China in realizing such growth in the economy. The most important thing that should be noted in this regard is that the majority of market participants in China are comprised of real entities and small investors, whose strong demand and overvaluation of Chinese economic growth rate led to the formation of a price bubble that burst at the signs of deterioration in the outlook for the economic growth of the country, causing a sharp fall in prices.
The reason behind the weakening outlook for Chinese economic growth trend can be described as follows; the main problem confronting today’s world is the problem of demand in consumer goods, which are mainly produced in China and then sold to the rest of the world. One of the major reforms that are presently taking place in China is the change in the structure of investment industry towards services consumption. During the past years China was primarily concentrated on attracting investment for productive and infrastructural assets, thus international commodities market was thriving the demand for base metals stayed high as a result of conditions in Chinese economy. However, it seems that in the future China will be focusing more on absorbing investments for advanced technology and human resources. Now the question that arises here is whether China, as the second economic power in the world, would still be capable of stimulating the demand in the commodities market sole handedly or not? On the other hand will China, as a major player in the world’s production markets, be able to influence the supply side by reducing it production volume?
To answer this question it should be noted that China needs a comprehensive development in its industrial infrastructures since the country has been concentrated on producing raw materials during its transition period and technological and industrial commodities had a smaller share in its production basket. This has led China to have a dominant role in production, consumption and international trade of industrial metals and its shares in global production of aluminum, coke, iron ore and zinc reached 40 to 50%, for copper and nickel 35%, and for bauxite 20%. Since the year 2000, China’s steel production has had a rising trend and the country’s share in the global production of raw steel has increased from 15% in 2000 to around 56% today. According to the above numbers and the growing consumption in China’s economy we can probably argue that the global level of demand has not changed and China has been responsible for saturation in some of the markets.
The next point concerning China’s economy is the outlook of the real estate sector in this country. It is evident that the supply of housing in China has been exceeding its demand and considering the policy of population control that have been implemented in the country, mass constructions have not been in harmony to the real demand in urban societies of China. Based on the assessments, nearly 2% of the economic growth in this country is directly or indirectly due to the housing sector, and the demand in this sector of the economy has been increasingly deteriorating the outlook for economic growth rate of the country. Formation of uninhabited suburban townships is evidence to the fact that domestic consumption in this sector cannot be responsive to the excess supply in the housing sector in China.
On the other hand, the anticipated economic changes in the United States for the upcoming years have been casting a shadow over the outlook for the Chinese economy. The increasing interest rate policy in the US will encourage investors to take back their investments to the US economy, thus leading the capitals to leave the China towards the United States or other emerging economies as time passes. Moreover, the majority of 3,330,000 million dollars of Chinese exchange reserves are in the shape of US bonds, whose value will diminish in the face an increase in the US interest rates, therefore resulting in a decline in the maneuvering power of the Chinese government.
Regarding the outlined prospect of the Chinese economy, in order to confront the sluggish economic growth of this country the Central Bank of China has reduced its interest rates four times since last November. Interest rate on one-year deposit of the People’s Bank of China is currently 2% and one-year lending rate is 4.85%. Legal reserves ratio of major Chinese banks is presently 18.5%, which is the highest legal reserve ratio among major global economies. Nevertheless, according to Bloomberg forecasts, a 2% reduction in this ratio will lead to the release of 2.1 trillion dollars of excess reserves for banks for the purpose of lending.
The slow trend in China’s economic growth and a drop in economic-trading activities of this country in different sectors including exports have resulted in a strong devaluation of its currency Yuan and the country has turned to the export policy of dumping. Given that Iran is one of China’s major trading partners, we can anticipate that Iran like other countries of the world who sell raw materials (such as Australia and Canada) and import intermediate and final commodities will definitely be harmed by this sector. This is due to the fact that global commodity markets are used to the large economy of China and the current and future prices in commodities markets will make them suffer. This is while companies that produce raw materials in Iran have an inappropriate and uncompetitive structure in their final prices and also during the period of high commodity prices in international markets they have turned to overspendings in industries and launching projects with low economic justification, which in turn has resulted in deep financial troubles for these companies and led them to pay large interest.
In revising how Iran’s capital markets are sensitive to drops in prices of commodities markets, table below shows that nearly 50% of Tehran Stock Exchange is obtained from companies that produce raw materials, primarily producers of chemical and petrochemical products, basic metals and extraction of metal ores, all of which will experience a drop in consumption as well as prices as a result of the situation in China. In addition, since most specialized and multi-division investment companies have allocated a large weight of their portfolio to industries producing raw materials, therefore the free-fall in Chinese financial markets will, in a time span of three to six months, lead to a drop in Iranian capital market in the above mentioned industries. Part of this drop happened during the slide in Chinese markets in the second half of 2015 and it is anticipated that due to uncompetitive production in Iran, the other part of this slide will take place in their financial statements of Iranian companies after the drop in global prices of products and a decline in companies profitability.
|Industry||Percentage of total market value|
|Extraction of Metal Ores||5.4|
|Cement, Lime, Gypsum||2.3|