The Economist, the British magazine which is seen by most journalists as the best of its kind and utterly dependable, has published an article strongly suggesting China’s economy may be less vulnerable to a bursting of the stockmarket bubble than it appears or has been suggested by assorted commentators.
It asks whether the 258% gain since the beginning of 2006 is a bubble waiting to burst and then answers itself.
First, it points to the actions of the People’s Bank of China in raising in both interest rates and banks’ reserve requirements. It allows that Chinese shares certainly look expensive, with an average price-earnings ratio of almost 50 (based on historic profits). But adds that p/e ratios are hard to interpret when profits are growing so strongly.
Over the past decade China’s p/e ratio has averaged 37, much higher than elsewhere.
The Economist article asks that you assume for the moment that this rally is in fact a bubble and that it eventually bursts; what would be the impact on China’s economy?
Its answer is that despite newspaper articles China’s stockmarket is still relatively small, so price movements have less impact on spending than elsewhere.
Despite the surge in share ownership this year, only 7% of the population own shares compared with around half of all Americans.
The total value of tradable shares — that is, excluding those held by the government — is only 25% of GDP (the market capitalisation is nearly 80%). This compares with 150% in America and over 100% in India. And, according to an article in the latest China Economic Quarterly, a large chunk of tradable shares is actually held by state firms and government agencies, so the true exposure of individuals is even smaller.
When Chinese share prices collapsed by 55% from 2001 to 2005, consumer spending and GDP growth proved robust. Today there are more shareholders, but their holdings are still small.
Equities account for less than 15% of Chinese households’ total financial assets, compared with half of those of American households.
In China there has been little sign over the past year that people are saving much less; the boom in retail sales has largely matched faster growth in income. If consumers have not spent their capital gains, then a slump in share prices should not have much impact either.
The second channel through which share prices usually affect an economy is the cost of capital; higher share prices make it cheaper for firms to raise equity finance and so they invest more. But only a small proportion of Chinese companies are listed on the stock exchange and those that are rely more on internal finance.
The direct economic impact of a fall in Chinese share prices would therefore be modest.
Most reassuring and, like all Economist articles, superbly written and edited.
Source: The Economist
