When the stock bubble burst, did it take the rest of China with it?

August 11, 2015
An investor looks at an electric board showing stock information at a brokerage house in Haikou

An investor looks at an electric board showing stock information at a brokerage house in Haikou, Hainan province, China, August 11, 2015. REUTERS/Stringer

How directly does activity in the stock market affect the rest of the Chinese economy?

“The answer, surprisingly, is not as much as you might expect,” said Steven McCord, commercial real estate firm JLL’s head of research for north China. “Honestly, the biggest direct fallout I’ve seen so far hasn’t gone beyond some jittery discussion among stock-playing colleagues, blaring newspaper headlines, and concerned emails from clients outside of China.”

For all the noise in the international media about China’s stock crisis, remarkably little of this volatility can be observed on the ground. At one point the Shanghai composite dropped 8 percent in one day, but Shanghai itself remained unfazed. Stores were still open, people were still shopping, public services and institutions were still up and running, nobody was rioting, everyone was going to work as though their country was free from any type of economic crisis.

“To be honest, while I’ve been reading about the free fall, the circles I’m exposed to here in Shanghai and across central China appear to have been relatively unaffected,” said Thomas Dunlop, the regional account manager of central China for Navitas, a wealth management firm.

Action in the stock market in China is not directly indicative of what happens in other parts of the country’s economy, and vice versa. At the height of the equities bull run, the year on year rise in retail sales had slumped to their lowest level in five years, “indicating how disconnected stocks and retail spending are,” Mark Tanner, the founder and managing director of China Skinny, a Shanghai based marketing, online, and research agency, explained. While conversely, with the stock market downturn still in full swing, consumer confidence was on the rise, according to Westpac MNI China Consumer Sentiment Indicator. Likewise, as the stock market was starting to soar in March, China’s exports plunged a dramatic 15 percent, before rebounding a few months later in the face of plummeting stocks. Throughout all of this, China’s banking sector was shored up solid, GDP remained flat at 7 percent, and the real estate market remained relatively unaffected. At least in the short term, China’s stock market seems to exist within the buffers of its own reality, kept at arm’s length from the other sectors of China’s financial matrix — from what is sometimes referred to as the “real economy.”

“Given the size of the drop, the damage has been surprisingly contained,” McCord said.

One of the reasons for this is the surprising limited role that the stock market really plays in China’s broader economy. First and foremost, China’s stock market has always remained small in proportion to the size of its economy, as well as the fact that Chinese companies are not nearly as dependent on equities for fund raising as their counterparts are in the United States or the United Kingdom. As previously reported by Bloomberg, China’s stock market only accounts for 11 percent of its M2 money supply, compared with 45 percent in Japan and 250 percent in the United States. Asset allocation to financial assets (including stocks) in China is 10-15 percent, compared with 29 percent in Japan and 61 percent in the United States.

Another major reason why the recent stock market free fall had a limited impact on the broader Chinese economy is that the portion of the population that was also directly affected is relatively small. Although 50 to 90 million stock traders may seem like a particularly large number, when contextualized against the country’s 1.37 billion people it’s a small fraction. According to various surveys, just 6 percent to 8 percent of China’s households directly invest in stocks, as opposed to 55 percent in the United States.

The way that the typical Chinese investment portfolio is divided up also limits the effect that volatility in the stock market can immediately have. Generally speaking, most of China’s big stock investors also have diversified portfolios that are often grounded in property. In fact, 39 percent of individual wealth in China is in real estate, while bank deposits account for 46 precent.

“I think many commentators, particularly in the West, are comparing [the recent stock crash] to a similar plummet in the West. But like many things in China they can’t be compared like-for-like,” Tanner said.

The stock market in China is no place for amateurs. Many of the people who lost big in the recent stock volatility were among the tens of millions of new and inexperienced traders who were blown in on the winds of hype, not really the segment of the society that provides the core of China’s equity investment. As summed up by JLL’s McCord, “. . . naive retirees and farmers losing their entire savings are not representative of the country’s investing class.”

To look at the colossal fall of China’s stock market without mitigating it against the much greater previous rise is to take a misaligned view of what has occurred. As of now, the bottom line is clear: even after the rapid collapse, China’s stock market is still 72 percent higher than it was at this time last year. Massive gains in equities are not usually part of the formula that topples economies.

“I wouldn’t really consider this stock market volatility as an economic calamity,” Damien Ma, the coauthor of In Line Behind a Billion People, said. “This isn’t exactly the disruption of the late 1990s, when reforms of the SOEs [State Owned Enterprises] led to some millions upon millions of laid off Chinese workers.”

As Tanner concluded, “Every boom is followed by a bust in stock – that is one thing that even the almighty Beijing is unable to change.”

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