Why China is desperate to prop up the stock market

China’s Mei Han at the FIVB Volleyball World Grand Prix. Photo: Getty

The massive bull market in Chinese stocks which propelled the benchmark Shanghai Composite to a gain of more than 150% in a little over six months before ending spectacularly in early June created a short-term sugar hit for China’s first-half economic growth.

Guangdong, Beijing and Shanghai, the regions accounting for the largest proportion of China’s household stock ownership, received boosts from their sizeable financial services sectors in the second quarter, according to a report from Bloomberg.

Shanghai, home to the now-globally recognised Shanghai Composite index and many major financial firms, saw its financial sector output surge by more than 30% over the first half of the year.

The rise saw its annual economic growth rate accelerate to 7.0% in the first half of 2015, up from 6.6% in the first three months of the year.

Like its financial hub to the north, Guangdong, home to Shenzhen, the wealthiest municipality in the nation by per capita GDP, saw financial sector output lift by 23% in the six months to June.

The city, home to the Shenzhen stock exchange which comprises the tech-heavy ChiNext index, experienced some amazing stock market gains over the first half of the year. The Shenzhen Composite rallied 74% while the ChiNext added a whopping 94%.

The huge rally in Shenzhen’s stock market saw total services output jump by a jaw-dropping 52.8% from June 2014.

In Beijing, China’s capital city and home to most of the nation’s massive state-owned banks, financial sector output jumped by 19.4% from a year earlier.

Overall, from a national perspective, financial sector output increased by more than 17% in just 12 months.

They’re amazing numbers. And to be frank, they’re also slightly concerning.

How can the financial sector continue to add to economic growth at such a rapid rate, particularly given the swoon in China’s stock market seen since early June?

That’s the question investors globally are asking, and explains the incredible determination of the government to underpin the nation’s stock market.

If the government fails to stem the carnage it won’t be only stock market investors who’ll lose out. It will also include every Chinese citizen thanks to a sharp slowdown in economic growth.

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