Why It Matters

China stock rout has big implications

An investor taking notes as he watches a board showing stock prices at a brokerage office in Beijing.
An investor taking notes as he watches a board showing stock prices at a brokerage office in Beijing. PHOTO: REUTERS

The plunge in China's bourses this week, despite unprecedented government steps to stabilise the market, has wide-reaching ramifications for the world's second-biggest economy and the region.

The benchmark Shanghai Composite Index fell 5.9 per cent yesterday, extending a slide since mid- June that has wiped some US$3 trillion (S$4 trillion), or more than 30 per cent, from the market value.

The decline follows a 152 per cent rally in the Shanghai index in the past year that the government had implicitly encouraged to push economic reforms, such as recapitalising state enterprises.

But, prompted by fears of damage to their public image and credibility, Chinese officials took steps last weekend to boost the market, including a pledge by major securities brokers to inject funds and the suspension of initial public offerings.

Observers say the market's lacklustre response could shake faith in the government, especially its ability to handle a crisis.Such perceptions could also hurt the standing and bargaining power of top leaders such as President Xi Jinping and Premier Li Keqiang in the lead-up to the Communist Party's informal leadership retreat next month.

The stock market rout and lessons drawn by the Chinese leadership from tackling it will also have an impact on China's economic interests. Regional economies such as Singapore's would also be affected. The turmoil could pile pressure on China's slowing economy. Stock losses could hurt domestic consumption, while companies struggling to raise funds could find it hard to operate.

Long-term reforms such as link-ups with overseas bourses could be delayed if leaders deem it better to retain state control. Such a mindset could also derail plans to let the market play a "decisive" role.

With millions of retail investors and their money at stake, the hope now is for the market to stabilise soon. As Nottingham University analyst Steve Tsang puts it, the "risk of social unrest cannot be dismissed" should the market continue to fall.

A version of this article appeared in the print edition of The Straits Times on July 09, 2015, with the headline 'Stock rout has big implications'. Print Edition | Subscribe