Asia Briefing: What lessons can be learnt from China’s stock market slide

For a few days last week, the world held its breath as the Chinese stock market plunged. The data made for heady reading: China's market lost 15-times Greece's GDP in market cap. Would Chinese people stop buying luxury goods and taking foreign trips, triggering repercussions in Ireland and other countries trying to woo the middle class?

In the end, the global economy didn’t collapse on the back of China’s great fall – not yet at least – but it was quite a sell-off and a reminder that the Chinese investment landscape remains fragile and less internationally plugged in than many might have thought.

One of the more challenging aspects for many investors was the government’s intervention to help prop up the market as it sought to fend off political instability as well as financial damage from a full-scale collapse.

The heavy use of margin trading to buy stocks had worried the government, and efforts by Beijing to reduce leverage and stabilise the market, including putting restrictions on investors who owned more than 5 per cent of a stock from selling for six months and cancellation of IPOs, rattled nerves as they seemed to show a less than pure belief in the market’s ability to right itself.

"In my view, the government probably should have allowed the market's early decline to run its course without additional interference that may have accelerated losses," said investment adviser Mark Mobius, in a blog post.

Global analyst and commodities editor at the Economist Intelligence Unit Mike Jakeman described the government's reaction to the sell-off as a worry. "Not so much about its short-term effectiveness, but because it represents the government moving away from putting greater trust in market mechanisms," said Jakeman. "We had hoped the government would allow market forces to take a greater hold of the economy in the next five years, but this is now less likely in the light of its reaction to the stock market fall. It still remains suspicious of market movements."

As well as that interference, there was a more sinister side to things after the police were brought in to investigate what was termed “malicious short selling”.

The deputy public security minister Meng Qingfeng visited the China securities regulatory commission's offices in Beijing last week, according to the official Xinhua news agency.

Hair-raising experiences

So where does China go from here? The fluctuations on the stock market are unlikely to be over yet and there may be more hair-raising experiences in the months to come. But what of the effect on such areas as consumption?

Will such activity affect the “wealth effect”, where households feel flush because of rising markets and spend, or feel poorer when values fall and keep their purses shut.

The impact in China is expected to be marginal. As China economist at Capital Economics Julian Evans-Pritchard points out few Chinese consumers are exposed to the stock market.

There are about 50 million investors in China – roughly one in 30 Chinese people, owned A shares. In contrast, one in seven Americans directly own stocks. This rises to one in two once indirect investments via pension and mutual funds are included, he wrote. Also the gains and losses of households in the stock market have been smaller than one might think.

“This is because over two-thirds of China’s market capitalisation represents the government holdings in listed state firms, which are effectively kept off the market. This means that, even at its peak, the portion of the stock market owned by private investors totalled less than 30 per cent of GDP,” wrote Evans-Pritchard.

This compares to market capitalisations in the US, India and Japan where the state has much smaller holdings in listed firms and they exceed 130 per cent of GDP.