China's markets are falling
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.