As the usual drivers of economic growth faltered in China, the stock market euphoria helped pick up the slack, driven by a slate of businesses feeding off the frenzy. With the market now cooling, the Chinese economy is losing a major boost, adding pressure on the government to take further action.
The stock market rise was fast and furious. At their peak in mid-June, China's main share indexes, the Shanghai and Shenzhen exchanges, had more than doubled over the course of a year. "What stands out in China's case is the sheer velocity of the increase in prices," analysts at Goldman Sachs wrote this week in a research note. To find a comparable performance in the United States, they had to go back to the 12 months that ended in July 1933, when the Standard & Poor's 500-stock index rose 124 per cent after the inauguration of President Franklin Delano Roosevelt and the devaluation of the dollar against gold.
The Chinese stock market rally has made for big business at the country's financial firms, a sharp contrast to the slump in manufacturing, real estate and other traditional sources of growth. It also gave banks, brokerage firms and other financial companies an outsize importance in the economy as a whole. In the first quarter of the year - the most recent comparison available - the output of the finance industry accounted for 1.3 percentage points of China's seven per cent growth rate. That compared with a contribution of about 0.7 percentage point to the 7.4 per cent growth in all of 2014. It accounted for 15.9 per cent of overall gross domestic product (GDP) in the first quarter.
On Wednesday, China reported that its economy in the second quarter increased by seven per cent, in line with government targets. Economists said the expansion had been helped by rising output from the financial industry. Securities firms were quick to cash in on their new-found sway and their own inflated market valuations.
So far this year, Chinese brokerage houses have raised more than $31 billion selling new shares in themselves on the mainland and in Hong Kong, more than five times as much as any previous annual total, according to the data provider Dealogic. Much of that money has been earmarked for expanding their margin financing businesses, in which they lend money to stock market investors.
Signs of the bonanza also spread to Hong Kong, where cash-laden mainland financial firms continued their expansion. In recent months, companies like Yunfeng Capital, a private equity firm co-founded by Jack Ma, the Alibaba Group's executive chairman, and Hani Securities, a brokerage firm owned by the conglomerate Fosun International, signed leases for new and bigger offices in prime locations in Hong Kong's main financial district, according to Henry Chin, the head of Asia research at the CBRE Group, a commercial real estate broker.
But China's market rally has cooled drastically in recent weeks. The breadth of the stock market sell-off poses risks to the country's growth outlook in the coming months. Fearing the rout, hundreds of companies suspended their shares from trading, creating an overhang that is only slowly being worked through as those stocks resume trading, usually to fall in value. Investors are also deleveraging as they sell shares, though hundreds of billions of dollars in margin financing remains outstanding.
Wang Tao, the chief China economist at UBS, calculated that, if the stock market volume fell to pre-rally levels, the slower activity in the finance sector could shave as much as a half a percentage point off China's GDP in the second half of the year, when compared with the first half. "Such a loss would need to be offset by other measures, including more fiscal support for further infrastructure spending to beef up investment," she said.
China has been seeking to counter its industrial slowdown through expanded infrastructure investment, including a combined 1.6 trillion renminbi, or $261 billion, to be spent this year on new rail lines and water treatment centres. These spending initiatives come alongside assertive stimulus measures taken by the central bank, which has cut benchmark interest rates four times since November. These measures appear to be helping the broader economy.
The leadership in Beijing has already demonstrated its readiness to prop up the stock market through direct and indirect support. This month, the central bank said it would underwrite a new $120 billion stock market stabilisation fund, regulators suspended new share offerings and the police said they would seek to investigate short-sellers and market manipulators. On Wednesday, the government further appeared to signal its determination not to allow the sliding market to weigh on growth.
"The Chinese government has the ability and confidence to prevent regional or systemic risks from occurring," Sheng Laiyun, a spokesman for the National Bureau of Statistics, said on Wednesday at a news conference in Beijing. He added, "It has the ability, conditions and confidence to promote the stable development of the stock market and of the national economy."
© 2015 The New York Times News Service
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