China households are not exposed to shares

From HSBC:

CaptureThe 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.

Comments

  1. What is the level of exposure to the share market among Chinese households whose wealth other than their PPOR is greater than the median price of a house in Sydney?

  2. 15% of wealth dropping by 27% is still a drop of 4% of the total. Nothing to be sneezed at.

    • Credit Suisse apparently released a report a couple of years ago predicting that by about now the total household wealth in China would stand at about USD$35 trillion. The USD$3.2 trillion lost from the peak by the Friday close seems a goodly share of that figure also.

  3. From the AFR:
    The Chinese Government has stepped in to put a temporary ban on 28 IPOs in response to the sell-down, amongst a range of measures aimed at restoring investors’ confidence. Meanwhile, China’s National Social Security Fund has prohibited its team of asset managers from selling Chinese stocks. The pension fund holds some $A159bn worth of shares and bonds.

  4. ceteris paribus

    What would happen in Australia if housing equity dropped 27% and still faced South?

    • Aah! Your savy battlers, mum-and-dad investors would double-in and buy-buy-buy! It’s different here, mate!

      Why do you even ask these questions? Haven’t you seen how handsome Reus looks? Wouldn’t you want to be as young, good looking and virile as him?

  5. “NB 2014 and 2015 are HSBC estimates.” i.e. the entire period of the recent ramp-up, during which a lot of people who wouldn’t normally be traders have entered the market. How well HSBC have modelled that is unknown, but I wouldn’t be surprised if it was underestimated, particularly towards the blow-off top when it seemed like literally everyone in China was piling in.

  6. What a load of rubbish. Chinese households are overwhelmingly exposed through shadow channels.

    Anything from HSBC should be taken with a grain of salt. They are wholly linked into the political structure and are no doubt doing the bidding of those higher up with that analysis.

  7. If the chinese household is margin trading, we really don’t know too much about the liabilities side of the balance sheet (particularly non standard loan sources). So lets say the graph data is 3-6 months old (ish), but margin calls are only getting called now. We don’t know how much cash is going to get destroyed in the fallout. Maybe the traders sell falling stock (if they can) to cover their losses, but they might also post up more cash, particularly given the size/severity of the recent falls. Sure it’s ok if 15% of equity gets wiped out, but how much of that cash/deposit % is going to get dragged into the black hole?