The Shanghai Composite Index has fallen 27% since 12 June 2015, a sharp drop versus the 117% jump over the previous eight months. These dramatic swings have raised concerns about a possible negative impact on the economy. In this note we look at the main channels through which equity market volatility can affect the real economy. First, our estimates suggest that the stock market wealth effect has less impact on consumption than many think. Consumption growth in China is largely driven by income growth rather than changes in wealth and Chinese households still park most of their wealth in cash and deposits. Less than 15% of their financial assets are invested in stocks. Second, the recent IPO rush notwithstanding, total equity financing year to date amounted to RMB289bn, less than 5% of total social financing over the same period. Third, although margin financing on the equity market has risen rapidly, the trend has started to reverse over the past few weeks.
This is the point I’ve been making recently about the Shanghai bust not being disaster in and of itself. At a 15% share of household financial assets equity holdings are relatively minor. Add property and the share becomes small.
By comparison, Australian households hold roughly 7% of their total wealth in direct shares but that rises to 28% when we throw in super so it’s around 20-25% net.
The real problem is the Shanghai bust complicating the existing hard landing.