After a series of dire warnings about a bubble forming on China’s red-hot stock market, that is, before the rout that started more than three weeks ago, now a chorus of assurances that the economic fallout from the downturn is not that severe.
Economists from Barclays, HSBC, ING and Standard & Poor’s downplayed the impact of the sharp drop in Chinese equities on the country’s economy, already facing its lowest growth rate for more than two decades in 2015.
First and foremost, they said the so-called “wealth effect” on Chinese consumption is minimal. Thus, consumer spending won’t probably be brutally bruised by losses in the stock market, which dropped more than 30% at some point since a June 12 peak.
“We are skeptical about its impact on growth. It depends on how far the correction goes. But so far it looks contained. The recent rally has provided a wealth effect, so it’s a boost to consumption and not a hit,” Tim Condon, head of research for Asia at ING Financial Markets, said in a phone interview with NexChange.
HSBC agreed.
“Consumption growth in China is largely driven by income growth rather than changes in wealth and Chinese households still park most of their wealth in cash and deposits. Less than 15% of their financial assets are invested in stocks,” HSBC’s chief economist for Greater China Qu Hongbin and his team wrote in a note.
This sentiment was echoed by Barclays’ economic research team who wrote in a note:
“We believe the economic impact from China’s leverage-driven equity boom-bust should not be overstated. Given the speed of the move, it is likely that the majority of consumers have not yet dramatically changed their spending patterns.”
Consumer spending in China accounts for about 35% of GDP, according to Dariusz Kowalczyk, senior economist at Credit Agricole.
S& P Asia Pacific chief economist Paul Gruenwald said the “the wealth effect” of the stock market’s fall “is likely modest”, citing three reasons:
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“The data suggest that wealth effects tend to be relatively weak across Asia, including in China. Income is the big driver of spending.
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Within wealth, the stylized fact is that changes in non-financial wealth (property prices) have significantly larger effects than financial wealth (equity prices).
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While the correction to date has been steep, the market is still about 50% above its end-Q3 2014 level, roughly when the rally began. That does not mean individual investors have not lost money, but it does mean that aggregate equity-based wealth is still up.”
S&P is keeping its 6.8% growth forecast for China this year, Gruenwald said in a statement.
Credit Agricole’s Kowalczyk, however, contradicted their views.
In an interview with NexChange, he said the stock market drop will probably result in a quarter to half a point reduction in the GDP in the third quarter of the current year.
“We are reviewing our 7.1% full-year GDP forecast for China this year. We might bring it down,” Kowalczyk said.
Commenting on the stock market, Gruenwald said a correction is necessary since the rally in China that began in 2014 was not supported by economic fundamentals.
Before the recent rout, the market has been rising and peaked at a seven-year high on June 12, while economic activities remain sluggish as gleamed from the shrinking manufacturing sector, weak property market, lower demand for loans, rising bad loans, among other indicators.
The Chinese government’s move to support equities is “not a good idea,” said Gruenwald, since “the market needs to find its appropriate level.”
China has done a series of measures to stabilize the market, restore investor confidence and arrest the downward spiral in equity prices including a rate cut, a reduction in the banks’ reserve requirement ratio, liquidity support from the central bank, stock purchases by state-backed institutions as well as brokers, fund managers, and companies themselves.
Photo credit: USDA China via Flickr