China's mar­kets are fall­ing

The Pak Banker - - OPINION - Wade Shep­ard

How di­rectly does ac­tiv­ity in its stock mar­ket af­fect the rest of the Chi­nese econ­omy? "The an­swer, sur­pris­ingly, is not as much as you might ex­pect," said Steven McCord, head of re­search for north China at com­mer­cial real es­tate firm JLL. "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-mar­ket cri­sis, re­mark­ably lit­tle of its 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 mar­ket's bull run, the year-onyear rise in re­tail sales had slumped to their low­est level in five years, "in­di­cat­ing how dis­con­nected stocks and re­tail spend­ing are," ex­plained Mark Tan­ner, the founder and man­ag­ing di­rec­tor of China Skinny, a Shang­hai-based mar­ket­ing, online and re­search agency. 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. Con­versely, when the stock mar­ket's down­turn was still in full swing, con­sumer con­fi­dence was on the rise, ac­cord­ing to the West­pac MNI China Con­sumer Sen­ti­ment In­di­ca­tor.

Through­out all this, China's bank­ing sec­tor was shored up solid, gross do­mes­tic prod­uct 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, 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 [mar­ket's] drop, the dam­age has been sur­pris­ingly con­tained," McCord said.

One of the rea­sons is the sur­pris­ing lim­ited role that the stock mar­ket 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 per­cent to 15 per­cent, com­pared with 29 per­cent in Ja­pan and 61 per­cent in the United States.

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