China’s stock market doesn’t reflect the economy

January 11, 2016 2:48 PM (UTC+8)

 

Chinese stocks continued the slide they began in the first week of the new year with another big drop, leading many global investors to worry that the state of the world’s second-largest economy is worse than had been previously thought.

On Monday, the Shanghai Stock Exchange Composite Index dropped 5.3% to 3,017, following at 10% slide last week. The Shenzhen Stock Exchange Composite Index tumbled 6.6% to 1,848.

But there’s a flip side. While China’s economy lost steam steadily through 2015, more than a few analysts note that China’s stock market is both a very bad reflector of the current state of the economy or predictor of where the economy will be in a year. That’s because of the market’s peculiar make-up. About 80% of the transactions are made by retail investors — a sharp contrast to Western markets where institutional and professional investors dominate. This leads the stock markets to have less impact on the real economy than those elsewhere.

“I think there is little connection between the falling stock markets and the real economy,” Shen Lan, an economist at Standard Chartered in Beijing told Reuters. “Actually, economic indicators in November already showed the economy gained more momentum.”

In fact, most economists disagree on when the economy will bottom, as already auto and property sales are beginning to bounce back.

The problem for policymakers has been that consumers have not been able to pick up the slack fast enough to offset falling industrial demand, said Reuters.

“The economy is likely to slow further in 2016 as a result of persistent excessive capacity problems,” wrote analysts at OCBC Bank in their outlook for the current year. “On a positive note, the transition towards a service and consumption-driven economy is likely to provide a buffer to China’s growth. Therefore, we expect China to grow around 6.7 % in 2016.”

Even analysts at Nomura, who expect growth to fall below 6% this year, said, “We believe systemic risk remains under control and do not expect a hard landing any time soon.”

Despite the slowdown in the broader economy, there remain pockets of growth. Last year, China’s services sector proved to be one of economy’s few bright spots with sector activity hitting a 16-month high in December.

And China’s move to a consumer-based economy is slowly, but surely, taking hold. In November, vehicle sales rose and are forecast to grow 5% to 7% in 2016 topping the 3% expected for 2015. In addition, more signs show that people are willing to spend money, include a report by the Beijing Morning Post that said many restaurants in the capital are fully booked for Chinese New Year’s Eve early next month — suggesting more people are planning to go out. Also, the latest “Star Wars” movie just enjoyed a record-breaking opening weekend in China.

“We think China’s economy is stabilizing in the fourth quarter,” Zhou Jingtong, an analyst at Bank of China in Beijing told Reuters. “There are no signs that the economy is getting worse, as official PMI improved in December. The consumer prices remained high while the factory-gate prices did not drop further.”

“China’s equity markets move independently of its economy,” said a note last week from London-based Capital Economics. It said the economy was stabilizing as recent data had been better than was expected a few months ago.

China is expected to release its figures for 2015 on Jan 19. The forecast says economic growth will come in at 6.9% in 2015, down 7.3% in 2014, its slowest pace in 25 years.

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