Only real economic growth can calm stock market turmoil
If the ongoing turbulence in the global stock markets, the Chinese stock market in particular, is a cause for alarm, increasing uncertainties about the prospects for global growth justify urgent measures to shore up economic growth.
The latest monetary easing by China’s central bank should be more than welcome in the light of the importance of a healthy Chinese economy not only for the global recovery but also investor confidence at home and abroad.
After two consecutive days of 8 percent losses in the Chinese stock market, the sharpest two-day plunge in about two decades, the People’s Bank of China announced cuts in interest rates and the amount of reserves banks must hold on Tuesday; the second round of cuts in two months.
However, the initial response did not seem encouraging. In theUS stock market, concerns about China’s economy resulted in the major indices turning negative in the final minutes of trading on Tuesday, after previously climbing almost 3 percent.
While domestically, the performance of the benchmark Shanghai Composite index, which failed to retake the psychologically important threshold of 3,000 points on Wednesday, indicated that China’s central bank had achieved little in cheering up nervous investors.
For those who have expected the Chinese government to stand against the tide to lift share prices, theymay feel disappointed about the latest move. Actually, some of them even blamed the plunge in Chinese stocks on the government being too tardy with its rescue efforts.
Yet, should Chinese policymakers try to put a floor under the market again or just let the investors thrash out the true value of Chinese stocks? Since Chinese share prices are still about one-third higher than a year ago, it is hard to tell if the stock market rout will come to an end any time soon.
Yet, a bitter but timely lesson that Chinese policymakers have seemingly learned from previous efforts to arrest the downward spiral of share prices is the absolute need to support the real economy.
It is unfortunate that China’s economic
In the long run, share prices in a healthy stock market should reflect the performance of listed companies which, on the whole, is determined by the health of the economy.
slowdown is shaking the world economy nowadays. Although it is exaggerating to say that China has become a threat to global growth, the fact is the Chinese economy, a long-term leading global growth engine, is losing steam at a moment when the world economy has ground to its slowest annual growth since the 2008 global financial crisis.
As the world’s second-largest economy, China has gone all out in recent years to shift its growth pattern from heavy reliance on trade and investment to more sustainable growth driven by innovation and domestic consumption. Successfully attaining this economic transformation would mean as much to the world as China’s rapid growth over the past three decades.
While the stakes are high, the difficulties in pushing through the country’s economic transformation are also huge as the double whammy of sluggish growth and a stock market crisis show.
China’s latest monetary easing may not ratchet up enough support for the plunging domestic stock market. But it can give a needed boost to the stumbling real economy by lowering financing costs. More importantly, it sends a clear signal to the international community that Chinese leaders will focus on real economic growth rather than the valuations of stocks.
In the long run, share prices in a healthy stock market should reflect the performance of listed companies which, on the whole, is determined by the health of the economy. For Chinese policymakers who have to deal with an economic slowdown and a stock market rout at the same time, the principle should always be that the tail should not wag the dog.
To cushion the global recovery against increasing uncertainties like falling commodities prices and the runaway depreciation of emerging economies’ currencies, more government efforts are needed in China and around the globe to boost economic growth, not just rally share prices.