China 'has room still to reverse share rout'

A screen showing the Shanghai Composite Index and the Shenzhen Component Index.
A screen showing the Shanghai Composite Index and the Shenzhen Component Index. PHOTO: AFP

Beijing has many policy options even as panic selling is easing off, say analysts

China's share market turmoil could hit the country's already slowing economy and have some fallout across the region but analysts do not see a prolonged crisis developing.

They told The Straits Times that the panic selling in China seems to be slowing while the government still has plenty of policy options up its sleeve to reverse the share rout.

Some of that was evident yesterday when the Shanghai Composite gained 5.76 per cent while Shenzhen ended 3.76 per cent higher. The rebound came after Beijing banned shareholders with large stakes from selling.

But retail investors have taken a major hit with Shanghai down 28 per cent and Shenzhen losing 38 per cent since the mid-June peak.

"The estimated loss of wealth from this drop amounts to around US$2 trillion (S$2.7 trillion) to US$3 trillion - bigger than the troika's US$300 billion Greek debt exposure. The immediate impact will be a significant drop in consumption," CMC Markets analyst Nicholas Teo warned.

Credit Suisse analyst Michael Wan said: "If this continues unchecked, there may be a negative wealth effect as the dominant retail investor base in China loses money. This could affect regional exporters, which look to have struggled in the second quarter."

Singapore's non-oil domestic export shrank by 0.2 per cent year on year in May, due partly to a 4.3 per cent drop in exports to China and a 5.6 per cent fall in shipments to the euro zone.

"The stock market crash has also spilled over to other assets such as bonds, commodities and currency; we already saw the yuan coming under pressure," OCBC China economist Tommy Xie said, referring to offshore yuan's drop this week to its weakest against the US dollar since April. "If the crash persists, what started as a China problem will become a problem for emerging Asia. Coupled with the Greek debt crisis and impending Fed rate hike, it's going to be a double whammy to regional economies."

However, most analysts believe that this is unlikely to happen, with Mr Xie noting the panic sell-off in China is nearing its end as market speculation continues to unwind.

"The crash has weeded out a lot of the market's speculative elements. On June 18, outstanding margin debt was still at 2.26 trillion yuan (S$492 billion); it's since dropped to 1.46 trillion yuan as of Wednesday."

Margin trading - buying shares using money loaned from brokers - was one of the key drivers behind China's world-beating bull run that began in July last year.

At the same time, the Chinese government still has ample policy headroom to stabilise both market sentiments and economic growth. Mr Wan said: "We believe the Chinese government will do - and can do - whatever it takes to prevent economic and market instability. Another 25 basis point cut in interest rates is likely by the end of this summer. The market crash hasn't changed our forecast of a 6.8 per cent full-year growth in China."

Capital Economics senior global economist Andrew Kenningham estimated that growth will come in at 7 per cent this year and 6.5 per cent next year.

"China should continue to contribute around a third of global growth, given that its share of world GDP is now so much higher than it was a few years ago. The slump in China's equity market should not affect this," he said.

Even in the worst-case scenario, Mr Kenningham said: "The Shanghai Composite is still up 8 per cent this year and is 70 per cent above its level this time last year... There is no evidence that the surge in the stock market since 2014 had a positive impact on (China's) household consumption, so it seems unlikely that the partial reversal of this boom will have a negative impact."

A version of this article appeared in the print edition of The Straits Times on July 10, 2015, with the headline 'China 'has room still to reverse share rout''. Print Edition | Subscribe