Only real eco­nomic growth can calm stock mar­ket tur­moil

China Daily (Canada) - - VIEWS -

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.

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