9 Jul 2015
China market chaos: Limited risk to the economy - Nomura
FXStreet (Bali) - Although policy may become looser than we forecast, Nomura Asian Economics Team believe that the negative impact from China's equity market chaos on the real economy will be small.
Key Quotes
"With the Shanghai composite index (SHCOMP) down more than 30% from its top within less than a month, equity market performance has, in our view, become the most uncertain variable in China’s economy through the rest of the year."
"However, the rapid market rally that began last year is widely held to lack grounding in economic fundamentals – a view we share – thus we believe the sharp correction now should in turn have little impact on the real economy. There used to be a correlation between equity market performance and consumption or production, but this has weakened since 2011 and almost faded last year."
"The mechanism that channels the paper wealth of the equity market into real household consumption demand is limited in China. First, Chinese households have a much higher savings rate than those in many other economies, which lowers the theoretic wealth effect on consumption. Second, the rapid swings seen in the equity market has resulted in the transference of wealth, rather than the creation and destruction of wealth. While undoubtedly many households have been hurt by the plunge, many others would have sold and profited."
"Third, much of the equity outstanding is held by the government, local governments and state-owned enterprises (SOEs), who now have to shoulder an even larger share of the nominal wealth loss than the private sector."
Key Quotes
"With the Shanghai composite index (SHCOMP) down more than 30% from its top within less than a month, equity market performance has, in our view, become the most uncertain variable in China’s economy through the rest of the year."
"However, the rapid market rally that began last year is widely held to lack grounding in economic fundamentals – a view we share – thus we believe the sharp correction now should in turn have little impact on the real economy. There used to be a correlation between equity market performance and consumption or production, but this has weakened since 2011 and almost faded last year."
"The mechanism that channels the paper wealth of the equity market into real household consumption demand is limited in China. First, Chinese households have a much higher savings rate than those in many other economies, which lowers the theoretic wealth effect on consumption. Second, the rapid swings seen in the equity market has resulted in the transference of wealth, rather than the creation and destruction of wealth. While undoubtedly many households have been hurt by the plunge, many others would have sold and profited."
"Third, much of the equity outstanding is held by the government, local governments and state-owned enterprises (SOEs), who now have to shoulder an even larger share of the nominal wealth loss than the private sector."