Putting the correction of the Chinese stock market into perspective
THE stock-market correction in China coincided with fears of a possible debt default by Greece, and the two events were seen as major risks to the global economy. But the fact is that China's stock prices remain more than 70 per cent higher than a year a
China’s stock market had a substantial bull run since mid-2014. The Shanghai composite index rose from roughly 2,000 at the end of June 2014 to roughly 3,200 by year-end, and to a peak of 5,166 on June 12 this year. The speed of the recent market slump was as dramatic as that of the rally, with the index sliding to roughly 3,500 from above 5,000 within a month.
But the series of policy interventions following the market drop should put any doubts about the Chinese government’s intention and ability to stabilise the market to rest, and we at Standard Chartered believe the near-term downside risk to the stock market has been contained.
That being said, the government does still need to address longer-term issues, such as a loss of faith in market rules.
The government will need to deal with the issue of a potential rise in “moral hazard”. China investors often look to the government to cover or reduce investment losses. In the stock market, however, investors have so far appeared to accept responsibility for their decisions.
But the regulators’ recent actions to sustain stock prices may fuel expectations of government support in the future, encouraging more risk-taking. The regulators will need to convince both domestic and international investors that market rules will be observed even in times of stress.
Consumption and
investment impact
The good news for now is that we do not expect the recent volatility to disrupt China’s economy materially in the second half of 2015. Despite worries about the impact of the slump on consumption and investment, evidence implies this will be limited.
The link between the stock market
and investment is weak, partly because equity financing accounts for only 3-4 per cent of total social financing – a measure of broadly defined credit in the economy.
Meanwhile, past evidence does not support a quick wealth effect from stock-market fluctuations in China. In the market’s boom-and-bust cycle of 2006 to 2009, retail sales did not respond quickly to the rally. They improved only over a year after the start of the bull market, and peaked almost a year after the highs in stocks.
In the most recent bull market, however, sales did not respond to the rally in the first place, so we expect the market correction to have very little impact on consumer behaviour.
Reality check
The recent plunge in China’s stock market, given that country’s role in the global economy, received worldwide attention. While concerns over the impact of such a dramatic fall are justified, they must be put into perspective: The recent moves in China’s stock market reduced 12-month capital gains by half, to about 75 per cent. However, households still have stronger balance sheets than a year ago, and the Chinese government appears determined to stabilise the market.
Shuang Ding is head of Greater China economic research, Standard Chartered.
