Chinese shares fell by 30 per cent in recent weeks. Photo / AP
Chinese shares fell by 30 per cent in recent weeks. Photo / AP
Slowdown will affect countries in the broader region, says HSBC Asia expert.
The conventional wisdom is that the recent crash in share prices will not have a big impact on China's economic growth but Frederic Neumann, HSBC's co-head of Asian economic research, is not so sure.
Chinese shares' 30 per cent fall over the past few weeks came after they had more than doubled in the preceding year, during which the economy continued to slow.
The number of retail investors though large in absolute terms is small relative to China's population and the sharemarket crash in 2007 had no significant "wealth effect" impact on the real economy. So goes the prevailing view.
"This is a big confidence shock to the Chinese, as it would be to any other country," he said. "It will have rattled some nerves."
The overheated equity market overlapped a period when the property market cooled rapidly; for most of the past year it was going backwards.
But in the past couple of months the real estate market appears to have stabilised, with transactions rising 15 or 16 per cent on year-ago levels.
"So quite a convincing rebound," Neumann said. "The big question now is did that rebound only occur because of the rise in the sharemarket and the wealth effect that created?"
Would that reverse now that share prices have plunged or was it an independent recovery? The jury is out, Neumann said.
"I think there will be some impact on the real estate market - not devastating but it could slow again."
He expects the sell-off in equity markets to reduce China's gross domestic product by 0.2 to 0.4 per cent over the coming year, requiring further stimulus by the Chinese authorities to offset that.
The annual GDP growth rate of 7 per cent recorded in the June quarter Neumann believes is close to the sort of pace which is critical for financial stability in China's highly leveraged economy.
HSBC's co-head of Asian economic research Frederic Neumann.
"If we slip rapidly below that to, say, 6.5 or 6 per cent next year that would have implications for the financial system - not necessarily devastating implications, but it would certainly mean the policymakers would have to work much harder to ward off deterioration in asset quality."
The equity market sell-off is also a setback for the broader economic reform agenda, which included allowing heavily indebted local governments to sell off stakes in state-owned enterprises.
Rebalancing China's economy from growth top heavy in investment (especially in buildings) towards growth led by consumption (and services in particular) remains the goal.
"China doesn't have a real estate bubble. It has a construction bubble. Housing construction as a share of GDP is around 24 per cent. That's extraordinary. In the United States at the height of its real estate bubble housing construction was around 7 per cent of GDP," Neumann said.
"The problem is that the deflation of the construction bubble has happened too quickly. The other parts of the economy didn't expand fast enough to offset that. So what is occurring now is they are trying to reflate construction to some extent to ease that transition."
China's slowdown inevitably affects the broader region, not only commodity producers such as Australia and New Zealand but suppliers of capital goods and components like Japan, Korea and Taiwan.
And weakness in first property and, latterly, equity markets within China has increased the incentive to invest abroad for those who can get around the country's capital controls.
Beijing's policy is ultimately to open China's capital account, albeit much more gingerly than New Zealand did in the 1980s.
"The Chinese have recently opened the capital account for inward investment more aggressively than for outward investment. Outward investment is increasing but in terms of liberalising capital controls it is an asymmetrical process," Neumann said.
"I think that trend will continue because at a precarious moment for the Chinese financial system and when the economy is slowing, opening capital controls and allowing further capital outflows could limit policymakers' room for manoeuvre. They are currently in the mode of trying to reflate the Chinese economy, cutting interest rates and injecting liquidity.
"If you open the capital account and let Chinese savers take their money abroad that could make it more difficult to deliver a stimulus."
