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.
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.
