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Don't blame the economy for China's latest market meltdown

Monday, January 11, 2016 - 21:14
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A renewed plunge in Chinese stock markets has stoked concerns among global investors about the health of the world's second-biggest economy, but there is little evidence that the outlook for China has darkened dramatically in recent weeks.

[BEIJING] A renewed plunge in Chinese stock markets has stoked concerns among global investors about the health of the world's second-biggest economy, but there is little evidence that the outlook for China has darkened dramatically in recent weeks.

China's economy lost steam steadily through 2015 and economists are split over when they expect it to bottom out. Auto and property sales are showing signs of life, however, and few are predicting the kind of "hard landing" that the recent tumble in share prices might suggest.

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

China has topped investors' concerns at the start of 2016, with a 10 per cent slide in Chinese equities last week triggering a broad sell-off in riskier assets. China's benchmark share indexes fell a further 5 per cent on Monday.

Manufacturing and investment, the twin engines of China's breakneck growth over three decades, have been suffering a prolonged slowdown as Beijing attempts to guide its economy on to a more sustainable path led by domestic consumption.

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

"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 per cent in 2016."

Analysts at Nomura were more pessimistic, predicting growth to slip below 6 per cent this year, but added: "We believe systemic risk remains under control and do not expect a hard landing any time soon." Figures for 2015 are due to be released on Jan 19. Growth is expected to have cooled to its slowest pace in 25 years of 6.9 per cent in 2015 from 7.3 per cent in 2014, a central bank work paper said recently.

China's services sector has been one of the few bright spots of the economy over the last year, and an official measure of the sector showed activity at a 16-month high in December, although a private-sector survey was more subdued.

Vehicle sales rose in November, and are forecast to grow 5-7 per cent in 2016, faster than the 3 per cent expected for 2015, while January-November property sales numbers showed a modest improvement.

There is also some anecdotal evidence that Chinese consumers are not expecting the economy to go over a cliff.

The Beijing Morning Post reported that 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 and spend rather than following the tradition of preparing their "reunion dinner" at home - while the latest "Star Wars" movie just enjoyed a record-breaking opening weekend in China.

"We think China's economy is stabilising in the fourth quarter," said Zhou Jingtong, an analyst at Bank of China in Beijing. "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."

London-based Capital Economics said in a note last week that recent data had been better than was expected a few months ago, suggesting the economy was at least stabilising, but that the improvements had so far been "too small to shift market sentiment".

That sentiment is notoriously fickle in China's volatile stock markets, which began 2015 on a record-breaking tear before swooning around 40 per cent in a mid-year crash.

Such volatility is partly due to the peculiar make-up of a market where 80 per cent of transactions are made by retail investors - a sharp contrast to Western markets where institutional and professional investors dominate.

Analysts point out that China's stock markets also have less impact on the real economy than those elsewhere.

Chinese companies rely more on bank loans and less on capital markets for their funding than Western peers and investors make up only a small fraction of China's huge population - there were just under 100 million retail investors at the end of 2015, data from China Securities Depository and Clearing Corporation showed, in a country of 1.3 billion. "China's equity markets move independently of its economy," said the note from Capital Economics.

REUTERS