China market rout seen having limited impact on economy
Margin trading by companies and major shareholders raises risk of corporate wipeouts or asset transfers if losses are insurmountable
After mainland China’s equity markets finished three consecutive weeks of losses, analysts are trying to work out what the damage will be to the rest of the economy.
A total of US$3.5 trillion has been erased from share valuations since a mid-June high – more than the combined market capitalisation of the FTSE 100 member companies – leaving the government desperately scrambling to backstop the markets against further falls.
Assuming the government can somehow hold the line, stop further routs and the vicious cycle of margin calls and forced share sales, the impact on the wider economy may yet be contained.
"The stock market wealth effect has less impact on consumption than many think. 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,” wrote HSBC economist Qu Hongbin and his colleagues.
Even before momentum started draining out of the near-year-long bull run, many analysts had concluded the paper wealth generated from any market gains was having little impact on consumer spending. So the logic goes, the same should be true in reverse.
Speculative capital rather than underlying economic growth was driving the markets
Though latecomers to the party will have lost big, especially if they leveraged up, mainland Chinese households on average have only 12 to 13 per cent of their financial wealth in stocks, UBS economists led by Wang Tao estimate.