While US stocks continue, on most days, to shrug off headlines about escalating trade wars between America and just about all of its trading partners, the same cannot be said about equities in China.
The Shanghai Composite officially entered a bear market on Tuesday, after falling more than 20% below a two-year high reached earlier in the year. The benchmark fell another 1.29% on Wednesday. Stocks in New York, meanwhile, are continuing up for the second day in a row, following news that the Trump administration will not slap harsh investment restrictions on China.
Despite Chinese leaders’ efforts to put on a brave face in public, some are sounding alarm bells. The dangers posed by a toxic mixture of trade tensions, rising US interest rates and domestic policies aimed at controlling debt growth may be too much for China to swallow all at once.
That is the general message one government-backed think tank sent with a study, leaked this week, which warned of “financial panic” in China.
“We think China is currently very likely to see a financial panic,” the Beijing-based National Institution for Finance & Development said in the study, as reported by Bloomberg. The research reportedly appeared briefly on the internet Monday, before being taken down.
“Preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years,” the authors urged.
The think tank also ominously warned that that leveraged stock purchases are at levels not seen since China’s market crash of 2015. One-third of the value of the Shanghai Stock Exchange was lost within the span of a month during the turbulence.
The sudden about-face in investor sentiment comes amid a broad selloff of emerging market equities as Trump administration trade threats increasingly look like a long-term strategy and not simply a short-term negotiating tactic. Many analysts see the protectionist measures threatening the synchronized global economic recovery which was a prevailing theme through much of 2017.