China’s stock market crash and its links to the global economy: not all that bad.

Despite the Chinese economy’s deep integration with that of the world (slowdown in China’s growth rate has been a major factor in the globe’s commodities slump), its stock markets are still relatively insulated.

First, the direct links: foreign investors only hold 2% of all Chinese equities, the rest is all dominated by retail investors. Chinese investors, who may have lost a fortune in recent, and ongoing crash, also have very limited holding of global financial assets, apart form of course the official foreign reserve.

Secondly, and you must be aching to ask, the knock-on effect: if the stock market crash impacts consumer and business spending, or worse yet, says something about the health of the economy, surely it will diminish Chinese demand for world goods (and that’s serious because not only is China the second largest economy, but it is also the top trading partner of more than 100 countries).

1. Remember the bull run since January occurred in the midst of a comprehensive slowdown; skyrocketing equities had little to do with actual economic activity, but more driven by retail punters
buoyed by the crowd enthusiasm, and funded my margin financing. And as Chen Long points out, “the economy is actually showing signs of stabilisation as industrial value-added business and property sales are rebounding.”

2. Surely it would significantly reduce consumer and business spending, the former having lost wealth, and latter losing one of its capital-raising channels? First, only stocks held is worth about RMB 13 trillion, less than 5% of Chinese household assets—RMB 50 trillion are bank deposits and property assets are more than RMB 150 trillion. Out of total financing in China, equities only represent 5%. So again, though a channel may have been lost, the more important source of capital, in China that’s loans from banks and bonds, are still very much on a green light.

Taken together, the impact on the economy, as it stands, is relatively minimal. So, we may shift all our energies and attention unto the situation in Europe, and hope that the people of Greece make the right choice.


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