Chinese sharemarket in chaos as retail investors get spooked

Although the eyes of the world are on Greece with its potential to undermine confidence in the eurozone, the unravelling of the Chinese sharemarket could have far greater implications for our economy.

Up to last Friday, the Shanghai Composite Index has had its steepest three-week decline since 1992, falling nearly 30% since mid-June.

The market rallied 2.4% on Monday in response to a Government initiative to extend credit to stockbrokers, provide liquidity to the market and limit short selling, but whether that increase proves sustainable in the days and weeks ahead is a moot point. On Tuesday the market began selling off again.

What the Chinese authorities are discovering is that it is much harder to support the market, especially once the retail investor - the mainstay of the Chinese sharemarket - has been spooked.

The authorities have been targeting short sellers and market manipulators, as well as relaxing the rules on margin lending, cutting trading fees and slowing the pace of initial public offerings (IPOs were halted for 15 months between 2012 and 2014 in an effort to boost the flagging market). But too little avail.

What this means for Australia is harder to discern. What we do know is that Asia is our major trading region and the fallout on China's sharemarket is spreading to other Asian countries that are key Australian markets, notably Korea and Japan. China, of course, is Australia's biggest trading partner.

Already it has helped push the Australian dollar lower, a direction that will cheer the Reserve Bank. But the positive spin-offs from a cheaper dollar will soon be diluted if China's sharemarket meltdown infects the broader economy, and the growth rate of 7% becomes a pipe dream.

Certainly it is hurting commodity prices already, with iron ore prices, in particular, under further pressure in the wake of the sharemarket fall-out, and that's hardly encouraging given its status as Australia's biggest export.

What should give Australia a degree of comfort is the willingness of the Chinese authorities to step into the market and take decisive steps to stem the tide.

They are clearly cognisant of the fact that while their sharemarket is highly speculative, there are risks to the broader economy and as was demonstrated in the aftermath of the Global Financial Crisis, policy levers will be used to avert any long-term harm to the economy.

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