Market mayhem will not affect broader economy

Updated: 2015-10-06 08:58

By Zhang Chunyan(China Daily USA)

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Fears that China is heading for an economic recession have been overstated. After last week's global market mayhem, concerns from Western analysts and economists surfaced again.

Talk was rife that the broader Chinese economy was in trouble after the Shanghai Composite Index suffered its steepest five-day fall since 1996 before bouncing back. But those remarks had a hollow, sounding ring when looking at the bigger picture.

When it comes to the overall economy, the stock markets in China play a minor role. In the United States and Europe, institutional investors are the major players in New York, London, Frankfurt and Paris.

In Shanghai, 80 percent are small individual investors with many looking to double their money as quickly as possible instead of investing in the long-term. This in turn has helped fuel the boom and bust cycle that saw the Shanghai Composite Index drop by 17 percent in three days last week before recovering sharply.

The fallout was felt in cities across the Western world as markets slumped.

Word quickly spread that the turmoil surrounding the Shanghai Composite Index was just part of a broader problem that underpinned a weak Chinese economy. By the end of the week, global markets had regained their composure and reversed the downward trend.

Markets, of course, have a tendency to overreact. At times, they can baffle the most ardent trader. Back in 2007 when China's growth remained steady, the bulls went on a rampage.

This year as growth slowed, the market soared before tumbling in the past six weeks. Unlike the rest of the "real" economy, the bubble finally burst on inflated stock prices.

After years of double-digit growth, the Chinese economy is going through a transformation. The export-fueled model of the past is being replaced by a more balanced economy, revolving around innovation, services and domestic consumption.

As the second-largest economy in the world, what happens in China will have global implications. But the long-term outlook is far from bleak. Services, not industry, are now driving the country's growth.

Wages are rising, which is fueling domestic demand, and the creation of non-agricultural jobs is strong, particularly in the creative sectors of telecommunications, technology and media, or TMT. The rise of the middle class is also attracting multinational companies from all over the world.

Obviously, there are still challenges ahead, but these are being addressed. Last week, the People's Bank of China, or central bank, cut its key lending rate by 0.25 percent to 4.6 percent.

In a statement, it cited "downward pressure" on economic growth and pointed out that this would reduce financing costs for companies and promote a "sustainable and healthy economy".

The PBOC also promised to pay close attention to liquidity, or the availability of credit, in a move to ease concerns that a rise in capital outflows from China might stifle lending.

But more still needs to be done. At the macro level, China has to gradually reduce its debt burden, which exceeds 250 percent of GDP.

Moreover, the country needs to accelerate efforts to increase domestic consumption.

While it continues to rise, it is still below other nations as a share of GDP. Even so, the rest of the world needs to factor in China's "new normal" growth patterns, and give the country time to continue its economic reforms.

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(China Daily USA 10/06/2015 page16)