BEIJING, July 9, 2015:
China’s stock market rout has wiped more than US$3 trillion (RM11.39 trillion) from share valuations, generating terrifying headlines and fears over consumer confidence, but analysts say the impact on growth in the world’s second-largest economy could be limited.
Over 99% of China’s more than 90 million stock investors are individuals, according to the China Securities Depository and Clearing Co – more than the membership of the ruling Communist Party.
Those who have lost money will have less to spend in a slowing economy that authorities are looking to rebalance away from infrastructure investment and towards consumer demand.
Since late last year authorities have broadly encouraged people to invest in shares, and Jeremy Stevens, Beijing-based Asia economist at South Africa’s Standard Bank, said that with 52 million new stock accounts opened so far in 2015 alone, “the reach of potential harm has widened”.
The Chinese Passenger Car Association, for example, said the weeks-long market retreat was a factor behind a 3.2% year-on-year sales decline in June.
“The stock market turmoil has led more people to put off their plan to buy new cars,” it said, adding that according to dealers some customers who had put down deposits had become “unwilling” or “did not have the cash” to pay the balance.
Even so there are systemic factors that could limit lasting harm to consumer demand and the real economy, analysts say.
The decline in overall market capitalisation represents a huge sum by any standard, and is equivalent to more than a third of the country’s gross domestic product (GDP) last year.
Despite the carnage of the last month, which has sometimes affected other markets, the main Shanghai index was still up more than 80% year-on-year at today’s close, and almost 15% higher on the start of 2015.
Actual losses are a far cry from the total decline, and economists said high household savings rates help limit damage.
UBS estimated the percentage of household wealth in the financial sector at just 20%, falling to 12-13% if property is included, much less than advanced countries.
Other asset classes could even benefit, analysts said, such as housing, a key sector long in the doldrums but which is showing signs of vigour.
“The property market, because it’s been improving already for several months, has started to drain liquidity from the stock market,” said Brian Jackson, Beijing-based economist with IHS Economics.
“Volatility in the stock market might amplify that rebound within the housing market.”
Continued growth is a key objective for the Communist authorities, whose legitimacy rests in part on their economic stewardship and continued improvements in living standards for ordinary Chinese.
Capital Economics estimates that “overheated trading activity” was responsible for adding more than 0.5 percentage points to GDP growth in the first quarter of 2015, and even more in the subsequent three-month period.
“The immediate economic downsides from a cooling off of activity in the financial sector are substantial,” its chief Asia economist Mark Williams said in a note.
GDP expanded 7.4% in 2014, the slowest pace since 1990, and growth weakened further in the first three months of this year.
Some analysts have been forecasting the economy will pick up in the second half as monetary stimulus measures such as four separate interest rate cuts since November have more impact, but the stock market turmoil could threaten that.
Jackson of IHS Economics warned: “If this volatility continues and more importantly, if trading volumes dissipate in the third quarter… that’s when you would see a hit to total growth.”
Some are more sanguine. ANZ economists Liu Li-Gang and Raymond Yeung say declines have much farther to go before impacting the broader economy.
Banks do not appear to have taken on stock-based assets as collateral when handing out loans to corporations, they said in a note, “suggesting that falling share prices will unlikely result in massive nonperforming loans”.
Their GDP forecast of 6.8% growth this year was safe, they added, “even if China’s stock prices return to the level prior to” the start of the rally in November last year.
But others are more worried about the resilience of the financial system.
“A large number of companies – facing weak demand, squeezed margins and falling profits – speculated in the stock market too,” Standard Bank’s Stevens said in a note, adding many offered shares as collateral when borrowing from banks. “Losses may reverberate through the banks.”
Bank of America Merrill Lynch equity strategists also expect significant damage, saying that investors have lost faith in the government’s capacity to control asset values and stress there may be a time lag before the worst aspects of the decline show up.
“The ripple effect from the market correction has yet to show up,” they wrote. “We expect slower growth, poorer corporate earnings, and a higher risk of a financial crisis.”