The current gloomy atmosphere that’s swirling China’s equity market extends far beyond the loss of investor confidence on the ability of the government to manage assets prices, be it stocks, bonds, or currency, according to Bank of America Merrill Lynch strategists.
In a July 7 note released Wednesday, strategists David Cui, Tracy Tian and Katherine Tai said the loss of investor confidence could trigger a downward re-pricing of these assets and the market correction will likely hurt economic growth, dent corporate earnings and put the country at a higher risk of a financial crisis.
The bank said the government’s implementation of measures to stabilize the market and keep equities from sinking further is a bit too late. As a result, investors would likely “assign less value” to future government “puts”.
“The net result of this volatile market is a transfer of wealth from the people on the street to the wealthy, including many major shareholders, who cashed out (A-share fund flows analysis, Jun 8). We expect this will likely hurt consumption down the road,” the strategists wrote.
“On corporate earnings, other than the drag from slower growth, many companies may have to book stock-market related losses over the next few quarters by our assessment.”
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