China´s central bank decided on Tuesday evening to step in with a few minor measures. Too little, too late to have any effect on the stock markets, tells business analyst Shaun Rein in Money Control. But since the real economy is doing pretty well, he sees little reason for real worry.
Rein: I think we all need to take a step back. So, the equity markets are plummeting, but the real economy is still doing pretty well. So, unless the equity markets continue to present a systemic risk, I do not think the government should launch a major stimulus plan. Unemployment is still pretty strong. The big concern right now that we all have to wonder is A, how much of the profits on the corporate side in China has been due to stock market change in the last six months rather than real process and B, even more importantly how many companies have used their share as collateral for margin financing so that they could invest in the stock market. So, if B is really quite negative, then we have a systemic risk. If B is not as large as a lot of analysts are thinking then the real economy is relatively okay even though it is definitely going to slow dramatically in the next few months or so.
Latha: But is this not different from what we have heard. We have heard a lot of experts saying that China there is an economic slowdown which was slower than what the world had discounted in the financial markets. That purchase managers’ index (PMI) was what triggered all the selling, not the stock market volatility. The worry is economic, not stock market at least for the world outside.
Rein: I think a lot of so called experts talk well but they do not provide any proof. So they have been saying that the government makes up the gross domestic product (GDP) numbers but, they do not provide strong analyses to why that is true and they do not comes up with something alternative. It is something like picking up a GDP number out of the hat. So, I just count what most of these so called experts say. If you take a look at it, unemployment is still pretty strong. It is still quite easy to get a job and it is symmetric that people need to look at. It is not GDP, it is not electricity growth, it is really more recent call that are they able to get jobs or not which they are and low income Chinese.
And they are often able to get jobs quite easily with salary increase of 10-15 percent. If you look at it, university grads this year are asking for about renminbi a month, that is 30 percent more than they did last year. These would be graduates from the top-tier universities in China. So, the economy is bad, do not get me wrong. It is very weak. But you have to detach from the doom based scenarios from a lot of these economists that are literally just pulling numbers out of a hat.
Are you looking for more stories by Shaun Rein? Do check out this list.