Principal cause of a poor August for share markets

Share markets had a poor August. It’s clear what the principal cause of this weakness was: concern about the Chinese economy. This concern has been exacerbated by three developments. First, China has devalued its currency. Second, the Chinese share market has fallen precipitously and has now wiped out all of its gains for the year to date. Third, commodity prices have weakened sharply. The first two points have been described by distinguished economist Stephen Grenville as “rather minor short-term issues”. The movement in the currency has been very small, and it only partially offsets the trade-weighted appreciation of the yuan caused by the strong US dollar. China’s policymakers were apparently surprised by the global reaction and are rumoured to have made a commitment not to let the yuan weaken past 6.5 to the $US, about 1.5% lower than its current level. The Chinese share market bears little relationship to the Chinese economy in total, and its day-to-day movements frequently owe a lot to whether or not officials are intervening. Click the (VIEW LINK) for commentary on commodity markets and Australia.