Wondering about a rate cut in China? Watch payslips, not stocks. Income from work has a far bigger sway on consumption than wealth. That means if wages and thus spending slump, the People's Bank might lower interest rates for the fifth time since November. Printing new money would be more potent, but it could sink the yuan.
Mainland equities offer a good test for economist Milton Friedman's hypothesis that permanent incomes, not windfalls, drive consumption. Consider first the stock-market wealth that households might confidently spend. Some has changed hands but the overall pot is largely intact. After the recent recovery, as of the July 13 close, the Shanghai Composite Index was 23 per cent below its peak - but still up by the same amount this year.
In fact, disposable income, which is mostly earned from work, has historically been six times as important to urban consumption demand as A-share wealth, according to a Breakingviews analysis. Unless that relationship breaks down, it looks like case closed in Friedman's favour. Low household equity ownership offers a further cushion.
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Recent curbs on equity fundraising, and general uncertainty, make bosses even less likely to hire new staff and open new factories.
And rate cuts could still be useful in helping revive flagging demand. Inflation at 1.4 per cent is too low for workers to demand liberal pay increases. Real urban wages grew less than seven per cent last year, the slowest since China joined the World Trade Organization in 2001.
Another option, if losses from margin lending dent financial stability, would be quantitative easing. The risks, though, might outweigh rewards. Weak global trade will limit gains for Chinese exporters and money-printing would pressure the yuan, exaggerating capital outflows. A sharp fall in the Chinese currency could also weaken the case for yuan's inclusion in the International Monetary Fund's reserve currency basket later this year.
Policymakers in China don't have many good options. But to predict their next move, look beyond the gyrations in the stock market.
