Here are three things to watch as China’s stock market has tanked this month, with share prices falling more than 30 percent in a decline that would be considered catastrophic anywhere else in the world.
There’s little chance that China’s market woes will directly affect the U.S. financial system. American investors and the 401(k) plans of ordinary folks cannot invest directly in what had been a sizzling market in China. Large investment banks such as Goldman Sachs could own some stock directly, but very little.
The stock market woes are also unlikely to immediately knock China’s economy off kilter.
“Did China’s economy transform during the 10-month market boom? No, it actually got weaker,” said Derek Scissors, a China expert at the American Enterprise Institute, a free-market think tank. “There is just no evidence that the stock market conveys to the Chinese economy.”
One reason why is that national banks finance much of Chinese business, not stocks as in the United States, where companies issue shares of stock to raise capital from investors.
“Despite the recent nosedive in share prices, the Shanghai Composite index is still up 8 percent year to date and the Shenzhen index remains more than 30 percent higher than its Dec. 31, 2014 close,” Jay Bryson, global economist for Wells Fargo Securities, said in an investment note ahead of Thursday’s market opening. “Unless stock market gains and losses instantly affect spending decisions by Chinese households, which seems doubtful, then the recent swoon in Chinese share prices may not have as large an effect on consumer spending as the . . . loss in ‘paper wealth’ may imply.”
Consider this number, $4 trillion.
That’s the amount of wealth estimated to have been destroyed in the market swoon since mid-June. It’s not an inconsequential number. There are 90 million Chinese thought to have a stake in their country’s stock market. That, too, is a big number, but still a fraction of citizens in the world’s most populous nation.
The bigger hit from the market dive is the credibility at home and abroad of China’s leaders. They are unelected and judged by the average Chinese on delivering the nation’s blistering pace of economic growth. Western powers judge them by the ability to make reforms and keep opening up China’s economy.
It is not a devastating blow, but it’s definitely going to make people think twice about grandiose Chinese proposals.
Derek Scissors, researcher at the American Enterprise Institute
The Chinese government has intervened in the stock market this week, and state media said about half of listed companies in China suspended trading of their stock in order to prevent steeper declines. If Chinese investors keep pulling out their money in the weeks ahead, it will be a blow to the leaders.
“That control is exactly what’s at issue in the stock market,” said Scissors, a veteran China watcher who argues that its rise in economic power has been exaggerated. “That (control) is not substantive. But it is symbolic and that is important.”
The steep swings also weaken China’s image.
“I don’t think this is a make-or-break event,” Scissors said. “It is not a devastating blow, but it’s definitely going to make people think twice about grandiose Chinese proposals.”
Will China try to export its way out its mess? It could decide to boost its economy and send more cheap goods to the United States and other rich nations.
Evidence of late, however, suggests the contrary. China has allowed its currency to appreciate against the U.S. dollar, rather than devalue its currency. That makes its goods pricier. And China wants the International Monetary Fund to treat its currency just like it does the yen, the euro and other big currencies held by banks across the globe. Setting up the currency for home-field advantage would work against that effort.
Another limit to exporting out of an economic slump is that rich Europe and Japan and developing nations alike are all barely growing.
“A quick fix seems unlikely,” concluded Frederic Neumann and Qu Hongbin, co-heads of Asia research for HSBC Global Research, an arm of the big global bank HSBC.