Yves Nosbusch




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The stock market and economic activity in China

The Chinese stock market has been through an extraordinary year. The Shanghai Stock Exchange Composite Index rose by 150% between 1 July 2014 and 12 June 2015. Since then share prices have nosedived, losing around one third of their value in less than a month.


Shangai Stock Exchange Composite Index 


Sources : Macrobond, BGL BNP Paribas



Apart from their sheer scale, these price movements may seem surprising given the points in time at which they occurred. During the rapid market rise, the news on economic activity was fairly disappointing. At 7.4%, the growth rate finally registered for 2014 was lower than in previous years. In particular, signs of a substantial slowdown in industrial production and the real estate market became increasingly apparent towards the end of 2014. In contrast, the recent stock market collapse coincided with a relative stabilisation in the economic outlook. Industrial production and retail sales have recovered slightly over the last few months, and there are signs of stabilisation in the real estate market. Growth in the second quarter of 2015 came out at an annualised 7% and appears to have slowed less than what may have been feared at the start of the year, even though the situation remains fragile.


If news on economic activity failed to cause the sharp rise in share prices or their recent fall, then what did? First, there is a catch-up effect. The stock market went through a period of stagnation after 2009 and failed to reflect the economic rebalancing initiated by the Chinese government, aimed at giving a greater role to domestic consumption and making growth less dependent on investment and exports. Second, financial liberalisation measures have set a wave of optimism in motion. Households, with their substantial savings, are looking increasingly to diversify their investments away from banking deposits and their controlled rates. With real estate having shown signs of fragility, many households have turned to stock market investments. Using debt to buy shares has also been made easier and margin trading has picked significantly in the last year. Today it accounts for over 3% of stock market capitalisation.


What kind of impacts could the stock market collapse have on economic activity? The direct effects on households should remain limited. Despite the recent enthusiasm, stock portfolios currently represent just 15% of their financial wealth. Banks and other financial intermediaries are exposed through a number of channels, particularly structured products and loans used to invest in the stock market. The collapse may also have a significant indirect impact on confidence, which probably explains why the authorities took such swift action. The central bank cut its key rate and reserve requirements at the same time. Further measures followed, including the easing of constraints on buying securities on margin, direct purchases of securities and directives for institutional investors.



Yves Nosbusch

Chief Economist

BGL BNP Paribas



Published on paperjam.lu (in French) on 23 July 2015.