Market tumult not seen as economic threat

Updated: 2015-07-02 11:02

By Paul Welitzkin in New York(China Daily USA)

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As China's stock market continued on a tumultuous course, US observers said the market will have little direct impact on the country's economy and that the government should move ahead with efforts to lift economic activity.

The Shanghai Composite Index slid 5.2 percent on Wednesday to finish at 4,053.70 while the smaller Shenzhen Composite lost 4.8 percent to end at 2,346.13. Stocks have re-entered the so-called bear market - generally defined by losses exceeding 20 percent - after gaining 5.5 percent on Tuesday.

Despite the market volatility, one observer told China Daily the impact on the Chinese economy will be minimal.

"China is only starting to open its stock market to foreign investors - some access to A shares, plus ADRs (American depositary receipts), etc. Official restrictions limit the ability of Chinese individuals to purchase foreign stocks or mutual funds. This means that the Chinese market is fairly insulated from world stock markets. It also means that the Chinese stock market is not nearly as important to the Chinese economy as is the property market," Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington wrote in an email.

Sung Won Sohn, a professor of economics at California State University Channel Islands in Camarillo, California, said China's market tumble will have a nominal impact on the economy. "Given the size of China's overall economy, I believe it (market pullback) will mainly have a psychological effect on the economy," Sohn said in an interview.

However, Chen Zhiwu, a professor of finance at Yale University in New Haven, Connecticut, said the breadth of the market boom may mean some fallout for the economy.

"The recent stock market boom started last year as worries and concerns about the Chinese economy emerged. In the past, the Chinese stock market was largely a side show to the economy because the Chinese financial system is dominated by the banks. But this time, due to the use of high leverage by a large number of speculators, a lasting and major reversal can cause troubles for the economy and society," Chen wrote in an email.

Market tumult not seen as economic threat

China has taken steps recently to aid the economy and help the market regain some stability. The country's central bank - People's Bank of China - trimmed lending and deposit rates by 0.25 percent and also lowered the amount of cash that large banks must keep on reserve by 0.50 percent.

"The Chinese government has been working hard and actively to control volatility. But the challenge is that since it has been public knowledge that the government wants to manage a lasting bull market through various interventions encouraging millions to buy stocks and pushing stock prices to unsustainable levels, almost all investors and especially leveraged speculators are super nervous. As a result, any noise can be magnified to cause large swings in stock prices," Yale's Chen wrote.

"Cutting interest rates and reserve requirements was very sensible," said Hufbauer. "The government would be well advised to let the stock market decline, but take measures to bolster the slowing economy."

Sohn said liquidity is the main tool the Chinese government and the central bank have to influence the market. "Liquidity manipulation is the most powerful tool the government has for the stock market. You can see it here in the US with Federal Reserve policy the last several years," he said.

Hufbauer and Chen said turbulence in the Chinese stock markets would have little effect on markets in developed countries like the United States and Europe.

paulwelitzkin@chinadsailyusa.com

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