Arthur Kroeber
Arthur Kroeber

Heated arguments still rage on the effect of the recent downturn of China´s stock markets. And while the government dealt badly with the financial markets, the effect on China´s economy will be limited, writes economist Arthur Kroeber in ChinaFile.

Arthur Kroeber:

It’s clear that China 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 7% of China’s population is active in the stock market and household balance sheets are dominated by property, bank deposits and wealth management products (most of which are effectively fixed-income instruments). 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, who 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. Given the continued vitality of trading activity, value added in financial services—which boosted GDP a bit during the bull run—does not look to drop that much.

More in ChinaFile.

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