China: Expert warns of 'retaliation' impact on the UK economy
Rachel Reeves's entire Budget strategy hinges on a "positive global scenario” - but with Chinese markets slumping today, if she is wrong, she risks embroiling the UK in a “major crisis” within six months, a UK-based banking expert has warned.
Stocks in China are tumbling today, with Shanghai’s benchmark falling by 6.6% and Hong Kong's index losing 1.5%, as investors sold off shares to lock in profits after recent rallies driven by hopes for significant economic stimulus. Other Asian markets saw gains, while US futures dipped and oil prices advanced.
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Economic stimulus measures from Beijing have so far failed to meet the high expectations which had built up after announcements by the central bank and other government agencies of policies aimed at reviving the struggling property market and boosting economic growth.
These measures, revealed in late September, initially spurred a rally - but momentum has since waned.
With Ms Reeves due to deliver her financial statement to MPs on October 30, Bob Lyddon, the founder of Lyddon Consulting Services, told Express.co.uk:"She’ll be looking at China, the US, Germany, anywhere for signs of the positive global scenario, as all her calculations hinge on that."
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Rachel Reeves is under pressure to deliver later this month (Image: Getty)
UK GDP must continue to expand and tax revenues must continue to rise to prevent serious upheaval, Mr Lyddon explained.
He said: "In that position one tends to blank out the bad news, or even, like the Chinese stock market, convert bad news (the economy is in the tank) into good news (the government is going to intervene).
"I only hope Reeves is looking at the UK GDP and debt as it is right now, not in September or August, and at projections for the debt that factor in what she and other ministers have already committed to as well as interest rates above 4%.”
China's President Xi Jinping (Image: Getty)
Referring to Ms Reeves oft-repeated claim that she had been left a ￡22billion funding black hole by the Tories, he continued: "If she hasn’t done it that way, there will be an even bigger black hole by March 2025 even if GDP is mildly positive.
“And if it is flat or even in decline she will have delivered a major crisis.”
Prem Raja, Head of Trading Floor at Currencies 4 You, had a rather rosier view, saying: "With the Pound currently very strong against the Chinese yuan (CNY), the effects of what China do this weekend could see the exchange rate get even stronger, which is great news for businesses importing from China and having to pay suppliers in CNY.
"However, the cheaper cost of goods may not be passed onto the consumer so we may not see a great impact on inflation going lower, but an optimist would say this is a possibility.”
A news conference from China's Finance Ministry, scheduled for Saturday, may offer further details on government spending, which has so far disappointed investors.
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The Shanghai Composite today fell 6.6% to 3,258.86, giving up gains from Tuesday, while the CSI300 Index lost 6.2%.
The smaller Shenzhen market's benchmark dropped 8.1%, and Hong Kong’s Hang Seng index dipped by 1.6% to 20,593.98, following a 9% drop the day before.
Financial analyst Yeap Jun Rong of IG said in a commentary: “A lack of new stimulus has been the cause of disappointment, with many market participants hoping that its fiscal policies will follow in the footstep of the financial ‘bazooka’ delivered in late-September, but there was clearly a step-down in yesterday’s announcement."
In Tokyo, the Nikkei 225 rose 0.9% to 39,277.96, boosted by a 4.7% rise in shares of Seven & i Holdings following reports that Canadian convenience store giant Alimentation Couche-Tard had raised its takeover bid by 20%.
Japan’s parliament was also set to dissolve today to clear the way for a general election, with Prime Minister Shigeru Ishiba seeking to consolidate his position.
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Elsewhere, Australia’s S&P/ASX 200 edged up 0.1% to 8,187.40, while South Korean markets were closed for a public holiday.
In the US on Tuesday, the S&P 500 rose 1% to 5,751.13, the Dow Jones Industrial Average climbed 0.3% to 42,080.37, and the Nasdaq composite led the gains with a 1.4% rise to 18,182.92.
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Meanwhile, the 10-year Treasury yield edged slightly lower to 4.02%, as investors adjusted expectations for future interest rate cuts by the Federal Reserve, amid strong economic data suggesting the US economy remains robust.
Oil prices continued to climb, with US crude rising to $74.11 per barrel and Brent crude increasing to $77.82, as tensions in the Middle East escalated following Hezbollah’s rocket attacks on Israel.
In currency trading, the dollar strengthened to 148.38 yen, while the euro slipped slightly to $1.0959.