The Shanghai Composite Index has fallen 27% in less than a month — a huge drop compared to the 117% gain over the last eight months.
And this splashy volatility has everyone worried about the precipitating negative effects on the Chinese economy.
But the actual effect may be less than analysts are expecting:
“The stock market wealth effect in China is smaller than many assume, as stocks represent less than 15% of household financial assets and equity issuance accounts for less than 5% of total social financing,” writes HSBC Chief Economist for Greater China, Qu Hongbin in a July 7 note to clients.
For the average household, consumption growth in driven primarily by income growth, not changes in wealth, according to Qu. And, furthermore, most households put their wealth in cash and deposits — not stocks.
As for corporations, most of them don’t rely on the stocks as a source of financing, and a huge part of China’s banking sector isn’t “imminently linked” to the stock market, according to Qu.
Excluding the recent IPO surge, the total equity financial year-to-date makes up less than 5% of the total social financing.
And “third, although margin financing on the equity market has risen rapidly, the trend has started to reverse over the past few weeks,” according to Qu.
Interestingly, not only do most Chinese people and corporations stay out of the stock market, but many also have a different view of the system than the average American or European.
“Local investors see the stock market as a short-term place for profit-taking, not an indication of China’s well-being, and are far more confident in the Chinese authoritarian, state-capitalist system (and are certainly untroubled by its sustainability as a new, hybrid model),” Eurasia Group president Ian Bremmer wrote in a note on Monday.
“I met hundreds of Chinese from very different corners of the Chinese system, and encountered no sense of impending economic crisis,” he added.
Of course, none of this means that Beijing’s just going to ignore what’s going on. Volatility still poses a threat to overall financial stability, and the government’s still trying to control the market (not unlike the US did back in 1929.)