The bearish Chinese stock market will probably have a limited negative impact on the economy as well as on the financial system, but Bank of America Merrill Lynch said it pays to remain “vigilant.”
“Given the still high market uncertainties, we shall stay vigilant on possible spillover risks if the government cannot successfully restore market confidence,” Bofa Merrill Lynch China economists Xiaojia Zhi and Sylvia Sheng wrote in a recent research note released on Monday.
The Shanghai Composite Index weakened Tuesday morning, halting three days of consecutive gains, as more firms that were suspended resumed trading. The index was last seen down 0.9%, according to MarketWatch, after closing up 2.4% in the previous session.
Zhi and Sheng joined other economists from Barclays, HSBC, ING and Standard & Poor’s in downplaying the impact of the recent market rout on consumer spending (as NexChange has reported last week), as well as on the economy as a whole.
Based on the previous rally in the second half of 2014, Bofa Merrill Lynch said there was no clear evidence of a positive wealth effect. Thus, the erosion of previous gains may not have such an impact on wealth. It cited two reasons:
-Around 90 million Chinese individuals – 7% of total population – own trading accounts and 51 million of them have holding positions.
-A small allocation of household wealth into the stock market, which stood at around 18% of total financial assets as of the end of May.
“We expect the latest stock market slump to have limited negative wealth effect on ordinary Chinese households,” the BofA Merill Lynch economists said, as they expect the government to roll out more measures to support both the economy and the stock market “if condition worsens again.”
Photo credit: nuomi @1280x1024.net via Flickr