Sorrell: China's Stock Market Bubble Has Burst

A long-term "impairment" in China's growth rates would have "very significant implications" for the global economy, according to the chief executive of one of Britain's biggest investors in China.

Speaking exclusively to Sky News, Sir Martin Sorrell, whose WPP Group employs 15,000 people in China, said the continuing slump in Shanghai's main share index reflected "concern about the unrealistic boom in Chinese share prices".

"This doesn’t change my thinking (about long-term investment in China, but) if the Chinese growth rate is going to be permanently impaired it has very significant implications for global GDP rates," he said.

Sir Martin's remarks underline the sense of caution which has engulfed many major UK businesses with a sizeable presence in the world's most populous nation following a series of unsuccessful interventions by Beijing in currency and equity markets.

WPP (LSE: WPP.L - news) , which will report half-year results on Wednesday, has outpaced its rivals in efforts to build a major Chinese operation across marketing services disciplines, and the company's share price has performed strongly, partly on the basis of its business there.

Sir Martin said that despite concerns about a slowdown in China's economy, the country would still be the most important global market in respect of incremental advertising spending increases both this year and next.

"Some pundits have started to revise GDP forecasts on basis that Chinese growth may be more muted," he said.

"The environment is tough: low growth, little or no inflation - in fact deflation - and clients don't have pricing power, and as a result they’re not investing for the long term."

Likening the current business environment to "hand-to-hand combat in the trrenches", the WPP chief added that efforts by China's government to prop up its stock market had clearly failed.

“One of the things they’re learning is you can’t fight the market, and so I think they’ve got to be a bit more laid-back about it.

"(Equity market) valuations were just too high, and so this is just the realisation that the bubble has burst."

But he added that the world's economy faced a bigger problem than China's stock market correction in the shape of a need to "rekindle the animal spirits of corporates in the West".

"They are still too conservative and short-termist. There is a degree of caution, and the geopolitical context makes companies even more reluctant to take risk."

Sir Martin, whose economic forecasts are frequently accompanied by vivid illustrations of the likely shape of global growth, predicted that German exporters who had "run riot" with the cheap Euro would find it more challenging after the devaluation of some faster growing market currencies.

Like many UK-based multinationals, the strength of sterling has hurt earnings recently, but Sir Martin said he was satisfied with efforts by the Government to help British exporters.

He also predicted that a rise in US interest rates was now "off the table for 2015" because of the stock market turbulence.

"We’re coming off the cheap money drug which has driven equity and bond market valuations to historic highs, and we're going through a painful process of coming off the drug," he said.