The European Union's problems dominated headlines during the second quarter of the year, but it was a tumultuous three months in China's markets -- and that country's economic remodeling -- that will hold greater implications for the global economy in the long term.
Chinese investors shaved 23% off the Shanghai Composite Index between April and June, a nose dive that put it at a 14-month low and left it in bear-market territory.
The Shanghai index of domestically traded 'A share' stocks -- accessible to domestic investors and a handful of overseas institutions -- finished at 2398.37, down nearly 27% so far this year, making it the weakest major stock market in Asia and one of the weakest in the world.
The Chinese stock market has declined even as the country's gross domestic product and companies' earnings grow by double digits.
The slide reflects deeper concerns among Chinese investors about several wild cards, including the effectiveness of Beijing's attempts to cool the housing market; the country's ability to sustain its strong economic growth amid rising labor costs; and the implications of a rising yuan.
Many of those fears came to the forefront in the closing days of the quarter, as investors pushed stocks down more than 7% during a six-day losing streak, driven by concerns that China won't be able to sustain its torrid growth in the second half of the year. Also worrying investors was a weak investor response to the US$23.3 billion Agricultural Bank of China Ltd. initial public offering scheduled for mid-July, which priced at a lower-than-expected range earlier this week.
Francis Cheung, a Hong Kong-based stock strategist with CLSA Asia-Pacific Markets, says he expects global investors to increase their exposure to China once it works through its current problems. But Mr. Cheung said that could take time, with downward revisions to GDP and earnings on the way and a continuing property tightening campaign that he believes Beijing is only 'midway through.'
How the China story plays out promises to have an impact on commodities like copper that figure large in construction, currencies like the dollar and global companies that are relying on the rise of the Chinese consumer.
In the near term, some analysts think Chinese investors haven't fully priced in the myriad risks to domestic stock prices. They point to the looming threat of a nationwide property bubble and labor unrest at a number of Chinese manufacturers that some think could signal an end to China's status as the world's factory floor.
Minggao Shen, Citigroup's chief economist for greater China, said that while the country's GDP and corporate numbers in the first half of the year have been surprisingly resilient, the real challenge will be maintaining those numbers as the uncertainties pile on.
'The one word that we're urging is 'caution,'' Mr. Shen said. 'The question now that many people have, including us, is not believing this kind of fast growth can be sustained in the second half of the year.'
Mr. Shen cites the European debt crisis, the relatively weak U.S. economy and China's own attempts to wean itself off last year's stimulus plan as the biggest risks. He expects export growth to fall to below 20% a year, far below China's historical figures.
As the quarter came to a close, a new theme took center stage: the pace at which China's currency appreciates. Policy makers in mid-June said they would allow the yuan to move beyond its narrow band and trade at a more flexible exchange rate.
Analysts remain divided on how much Beijing will allow the yuan to rise and what that might mean for stocks, though investors pushed the Shanghai stock index up 3% on June 21 after Beijing's announcement.
That excitement has since given way to broader concerns about growth, as well as lingering questions about Beijing's commitment to currency flexibility.
Those on the bullish side argue that loosening the yuan's peg to the U.S. dollar will help reduce trade tensions between the U.S and China and lower the specter of protectionist tariffs on Chinese exports, while helping Beijing broaden the monetary-policy options that are at its disposal.
That could give the Chinese government more flexibility to weather future economic challenges.
The rising yuan could also boost Chinese consumers' buying power at a time when investors and governments are searching for signs of rebalancing in the Chinese and global economies.
Others take a more bearish view, arguing that a rising yuan adds more pressure to a Chinese export sector at a time when that core engine of Chinese growth is already struggling with rising wages and a weak global economy.
China's attempts to cool its overheated property markets are another source of stress. If Beijing is successful in cooling off residential prices that have skyrocketed in the past year, it would damp property investment -- which directly and indirectly accounts for about one-fourth of China's GDP.
A bursting of the bubble would drain household wealth and hurt the share prices of developers, construction companies, home-appliance makers and car companies.
Amid the uncertainty, one group of investors has been bullish: large insider shareholders of Chinese companies, who in May were net buyers of A shares for the first time in nearly two years, according to Mark Matthews, a Hong Kong-based equities strategist with Macquarie Securities.
Taken together with what he regards as the positive yuan news, Mr. Matthews says, 'I would not want to be short China at this juncture.'
在本季度的最后几天这些忧虑浮出水面，投资者在六个交易日的连续下挫中，将大盘打压下跌逾7%，因投资者担心中国不能在今年下半年维持强劲的经济成长。另外心怀疑虑的投资者对中国农业银行（Agricultural Bank of China Ltd.）规模达233亿美元的首次公开募股反应冷淡，发行计划在7月中旬，本周稍早将发行价定于低于预期的区间。
里昂证券亚太市场（CLSA Asia-Pacific Markets）驻香港股市策略师Francis Cheung说，一旦中国解决了当前的问题，预计全球投资者将增加与中国相关的投资。但他说，这还尚须时日，因GDP和企业收益在下降，而地产紧缩政策仍在持续，他认为北京方面的房地产紧缩行动远未结束。股市持续下跌的影响可能远及中国封闭的A股市场之外，在全球多数地区仍在盼望中国带领全球经济强劲复苏之时打压了市场人气。
在这种不确定环境中，有一群投资者一直做多，那就是中国企业的内部大股东。麦格理证券(Macquarie Securities)驻香港股市策略师马修斯(Mark Matthews)说，5月份，这些股东在接近两年以来首次净买入A股。