Is the world ready for a Chinese stock market crash?

This country of 1.4 billion people now makes up around 15 per cent of global GDP, up from 4 per cent in 1990, after decades of double-digit annual growth rates. 

Last year its economy weighed in at $12.84 trillion (£9.77 trillion), having risen more than 10-fold since the start of the millennium. 

Only the US is bigger at $19.4 trillion.

China cannot be ignored and could prove to be an even more valuable trade partner for the UK after we quit the EU. 

Unfortunately there are also growing signs that the country is struggling to keep its economic show on the road. If it crashes, it could lead to a global pile-up. 

DEEP IN DEBT 

China has gone on a borrowing spree since the financial crisis in a bid to keep its economy going, with total debts quadrupling since 2007. 

They now total about 234 per cent of gross GDP, the IMF says, a figure that could hit 300 per cent by 2022. Communist Party bosses are trying to crack down on the country’s bank and non-bank lending, while simultaneously battling to shift its economy away from exports and towards services and consumption. 

This would be tricky at the best of times, but even harder at the tail end of a 10-year global stock market run, and with the added pressure of US President Donald Trump trying to push the country into a trade war. 

Emiel van den Heiligenberg, head of asset allocation at Legal & General Asset Management, is concerned about China’s financial stability as its stock markets fall and its currency, the yuan, weakens: “A Chinese economic hard landing or credit crisis is one of the biggest global risks out there. 

“As such, investors need to pay attention.” 

CHINA SYNDROME 

Many ordinary investors have more exposure than they think, as their pension and Isa portfolios may have global investment funds partly invested in China, or they may hold emerging market or China specific funds.

Even if you do not, you are unlikely to be immune, as a China meltdown would pull down global stock markets with it. 

The good news is that its economy is still rattling along, growing at an annualised rate of 6.7 per cent in the second quarter. 

However, many cast doubt on these official growth figures, with more reliable data, such as electricity usage, suggesting growth has slowed to between 3 and 4 per cent. 

TRUMP TROUBLE 

Schroders emerging markets economist Craig Botham said China’s economy has also been squeezed by the President Xi Jinping crackdown on risky lending, with the property market, factory output and export growth all slipping: “Policymakers hope to offset the slowdown with more monetary and fiscal stimulus, but this will take time to come through.” 

Investors are already suffering, with the MSCI China Index falling more than 5 per cent in June. 

However, Andy Rothman, investment strategist at fund manager Matthews Asia, is optimistic as corporate earnings remain firm. 

He said: “China is still the world’s best consumer story.” 

The big question is how far the trade war will escalate, with Trump back on the attack, announcing last week that $500 billion of Chinese goods could suffer penalties. 

However, Chris Beauchamp, chief market analyst at online broker IG, said markets are learning to tune out the noise: “They quickly recovered from their initial shock, which suggests his rhetoric is starting to lose its power.” 

SLOW GROWTH 

Analysts have heralded the death of China before, but so far they have been repeatedly proven wrong. 

Its stock market soared 54 per cent last year, according to MSCI, and you can invest in a low-cost index tracking exchange traded fund (ETF) such as iShares MSCI China ETF and SPDR S&P China ETF.

Alternatively, try a broader fund such as Vanguard FTSE Emerging Markets Index ETF, which is a third invested in China. 

Popular actively managed funds include Invesco Greater China and Fidelity China Region. 

Russ Mould, investment director at online trading platform AJ Bell, said that the bigger China becomes, the slower it will grow: “Something that grows at 7 per cent every year for a decade doubles in size. 

“That would be quite a feat for China given its size today.” 

FORTUNE COOKIES 

China now boasts some of the biggest companies in the world. 

Tech giant Alibaba Group operates in more than 100 countries and has a market cap of £479 billion, only slightly behind US tech giants Apple, Google owner Alphabet, Facebook and Microsoft. 

Another China tech company, Tencent, is valued at $450 billion and recently was tipped to be the world’s first $1 trillion company. 

Everything about China boggles the mind, as does the prospect of a China crash. 

Mould said: “The ruling party’s legitimacy rests on jobs and prosperity, so it will be doing whatever it can to prevent that from happening.” 

At the same time, Trump is looking to put China back in its place. Something has to give; let’s hope it is not the global economy.