Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 125

Chinese shares and currency red herrings

The main headline stories over the past month have been the sudden crash of the Chinese stock market bubble, the devaluation of the Chinese currency, and how they sparked a sell-off in global shares.

The bursting of the Chinese stock market bubble should not have been a surprise, as we wrote about it in May. The market is little more than a casino driven mainly by first time gamblers using borrowed money, and share prices have little to do with company fundamentals or the underlying economy.

The Chinese market fell by 26% midmonth but recovered partially to end down 12% for the month. To date the Chinese crash has wiped out just six months of gains, so the only people who lost money were those who panic bought in the frenzy earlier this year (many first-timers and many using borrowed money), and then panic sold in the crash.

Investors who had bought shares prior to March this year are still ahead. At the end of August the Shanghai Composite closed down 38% from its 12th June high. Fearing the crash would have wider implications for the Chinese economy the central bank cut interest rates and reduced bank reserve ratio requirements, increasing the amount banks can lend. It also suspended most listed shares from trading so shareholders were unable to sell shares. The main risk in emerging markets is the likely impact of a rising US dollar and US interest rates on US dollar borrowers.

Turning to recent currency moves, the real story of the past year has been the rise of the US dollar as the Fed prepares to raise interest rates with the improving US economy while other major markets are slowing, cutting rates and printing money. The Chinese have been remarkably patient watching the RMB being dragged upward by the US dollar peg. Over the past 12 months the RMB has fallen a tiny 4% against the US dollar, including the 3% “shock” devaluation on 11-12 August 2015. In contrast the Euro has fallen by 15% and the Yen has fallen by 14% over the same period.

Japanese and European company earnings and share prices have benefited from the falling Yen and Euro but US shares have struggled against the rising dollar and fears of higher US interest rates. Australian shares have also been flat, held back by the collapses in commodities prices and also by the big banks’ scramble to raise capital to reduce their leverage.

What else is happening in China?

The Chinese economy is probably growing at a rate much lower than the official 7%. Growth has been propped up since 2009 by debt-funded state-directed infrastructure spending. As the economy is slowing even further this year, the latest plan is to grow Beijing into a mega city of 300 million people that spills over into neighbouring Tianjin, Hebei and Shandong provinces. It has already started relocating government departments. The official unemployment rate is being kept low at around 4% by mega projects like these and also by keeping factories over-producing and then exporting the surpluses to the rest of the world, which has kept global inflation low.

Aside from the stock market fall the main market event in August was the sudden 3% devaluation of the RMB against the US dollar to help exporters. However by month end the central bank was having to intervene to prevent further declines, amid accusations from the US that China was enflaming a currency war.

Military tension also rose between China and Japan in the lead-up to the 70th anniversary of the end of World War 2. Nationalist pride directed against China is Japan PM Shinzo Abe’s ‘fourth arrow’ in his national revival plan. Also North Korea stepped up its war preparations against South Korea after a heated artillery exchange.

 

Ashley Owen is Joint CEO of Philo Capital Advisers and a director and adviser to the Third Link Growth Fund. This article is for general education only, not personal financial advice.

 


 

Leave a Comment:

RELATED ARTICLES

Hide and seek: the FX impact on global equity investments

2015 asset class review and 2016 outlook

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.