As China’s leaders survey the devastation in their A-share markets, which at one point lost $3.3 trillion in value, they should not be tempted to prop up prices continuously as this would only increase distortions in the cost of capital and bad investments.
Spillover from China’s stock markets crash into the domestic economy will likely to be limited since less than 10% of the population has equity investments, the banking system has relatively limited exposure to stocks, and the market index is still up on the year.
Trading partners have suffered more than China itself: think of commodities exporters, which have risen and now fallen with Chinese demand. Commodity-producing countries account for 40% of global GDP.
But the fallout should be limited. Firstly, Asian growth is slowing from a frenetic pace that is still faster than across most other regions.
Government debt-to-GDP levels remain moderate with the big exceptions of India and Japan.
The depreciation of the yuan since August is mild in comparison with the yen’s big moves in recent years.
And although some big multinationals depend on Chinese demand, broadly this is not the case. For example, although 38% of US corporate earnings are generated internationally, China accounts for only 1%.
China’s leaders may regret encouraging investors to buy into, and perpetuate, a bubble market. Now Beijing is scrambling to prevent capital flight, and it continues to prime the pump. China’s government debt level may be low, but the nation’s total debt, including that of financial companies, corporations and households, is now around 250% of GDP, a level comparable to that of the US, Australia or Germany.
Flows into dedicated EM bond funds plummet
A middle-income economy of this size has no need for fast growth, and using credit to maintain 7%-ish growth rates looks increasingly like a dangerous fetish.
Boldness is needed more than ever. The goal of rebalancing the economy in favour of consumption and away from investment spending by state-owned enterprises must be affirmed.
The government will undermine its objectives if its containment of stock-market volatility comes at the price of forbidding markets to play the decisive role in the economy that President Xi Jinping once envisaged.
About FinanceAsia Magazine
Established in 1996, FinanceAsia is the leading publisher of financial news in the Asia-Pacific region. Our combination of print and online products provide the latest news, analysis and insight into Asia’s financial markets.
Published monthly from our office in Hong Kong, FinanceAsia magazine provides our readers with the latest financial trends, interviews, features and investigative reports. The publication has a readership of key decision-makers at corporations, governments, investment and commercial banks, institutional investors, asset managers, brokers, traders and financial intermediaries.
Our regular sections include:
We look at the key data behind a topical theme in Asian finance, showcased with an array of graphs and tables.
A monthly opinion column from the FinanceAsia editorial team. We provide our thoughts on a topic making the headlines.
Deal of the Month
Our regular two-page spread with its signature artwork and in-depth analysis examines the equity, debt or M&A deal that we feel has had the biggest impact on the Asian capital markets that month.
For company CEOs and CFOs, what investors think is a critical concern, and in this column we help them understand just this. Each month we speak to a Chief Investment Officer of a top fund and outline their views on corporate governance, what stocks they like and where they expect to generate the best returns.
A monthly opinion piece from a respected author or commentator on Asian business, finance or economics.
People on the Move
Here we summarise the key hires, fires and moves at the region’s banks, highlighting at least one major move each month.
We examine the major primary markets deals of the month and comment on the quality of the debt or equity transaction and the secondary market performance.
The Arts of Finance
A light-hearted look at investment opportunities surrounding the arts business in Asia.