Arthur Kroeber
Arthur Kroeber

Economist Arthur Kroeber spells out three worries for China in the Business Standard. The stock market, short-term growth and long-term growth and reform. Here is his first worry. Damage to the economy seems limited.

Arthur Kroeber:

The stock market: It is clear that has just experienced a leverage-driven bubble disconnected from the realities of economic activity and corporate earnings, and that the government has severely damaged its credibility first by encouraging retail investors to join the party and then by its mind-boggling interventions to stem the rout. Yet it is also clear that forecasts of contagion from the bear market in stocks to the real economy via a negative wealth effect among individual investors are wide of the mark. Only about seven per cent of China’s population is active in the and household balance sheets are dominated by property, bank deposits and wealth management products. Equity losses will pinch household wealth, but not undermine it.

Other potential economic knock-on effects are comparably modest. Equity financing is a minor funding contributor to corporations, which rely mainly on retained earnings and bank loans. Contagion to the financial system would be a worry if brokers started going bust as a result of reckless margin lending, but this is not happening. Chinese brokers are not dangerously leveraged; they are cash rich. Shanghai volumes are actually higher now (60 billion shares a day in July) than they were back in May (54 billion). Given the continued vitality of trading activity, value added in financial services – which boosted gross domestic product a bit during the bull run – does not look to drop that much.

Two more worries in the Business Standard.

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