Already Weakening, China Economy Faces New Blow From Stocks

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Christy Chen had big plans for spending her winnings from China’s stock market. The 34-year-old Beijing school teacher envisioned a European holiday, yoga club membership and a few more tailored dresses in the wardrobe.

With unrealized gains of 400,000 yuan ($64,400) in early June after a year of stock trading, Chen looked forward to luxuries unaffordable on her monthly salary of around $1,200. But the sudden plunge in equities that began mid-June wiped out most of her returns, scuppering her spending plans for now.

While the extent of damage to China’s growth has yet to emerge as policy makers battle to shore up the stock market, Chen’s story flashes a warning sign for an economy already burdened with a property-market slump and export slowdown. Two-thirds of economists surveyed by Bloomberg this week saw at least some hit to gross domestic product this quarter.

That would come on top of an estimated slowdown to a 6.8 percent growth pace for the second quarter -- with results scheduled for release in a July 15 government report. On the flipside: The stocks sell-off means the central bank will accelerate monetary easing, according to nine of 15 analysts.

“The impact on household wealth and future consumption growth can’t be ignored,” said Shen Jianguang, the chief Asia economist for Mizuho Securities Asia Ltd. in Hong Kong. “For those who were lured into the stock market earlier this year, the losses are already huge.”

Target Hurdle

The stock market slump poses an additional hurdle to Premier Li Keqiang’s 2015 growth target of 7 percent. While the wealth effect is hard to quantify, signs of slowing demand are flashing. Volkswagen AG is offering financial assistance to support some dealers in China as demand slows. Auto sales fell for the first time in more than two years in June.

The government has responded, with a central bank pledge of liquidity, freeze to initial public offerings, calls for state-backed entities to boost holdings, and the ministry of public security stepping in to threaten those who “maliciously short trade stocks and stock index futures.”

Such efforts showed signs of traction Thursday, when the biggest rally since 2009 saw the Shanghai Composite Index climb 5.8 percent, paring a loss since June 12 to 28 percent.

“Those moves have succeeded in stabilizing the market only at the expense of a massive disruption of the market mechanism,” Bloomberg’s Chief Asia Economist Tom Orlik wrote in a note. “At stake is the credibility of China’s reform agenda. Confidence that the economy can sustain growth around 7 percent is predicated on commitment to market-based reforms.”

Smaller Contribution

If followed by a pullback in financial activity, the equities slump may lop 0.6 percentage point off the pace of GDP growth, said Xu Gao, chief economist with Everbright Securities Co. in Beijing, without specifying over what period.

If stock trading shrinks, the financial industry’s contribution to GDP may be 0.5 percentage point lower in the second half than it was in the first, said Wang Tao, chief China economist at UBS Group AG in Hong Kong. As such, the government has to do more, including additional fiscal support for further infrastructure spending.

Financial intermediation surged 15.9 percent from a year earlier in the first quarter, the standout performer among the nine industry groups outlined by the statistics bureau.

That was as people like Qi Xiaoyan poured into the market. Sitting on 200,000 yuan in profits just weeks ago -- about double his annual income -- Qi had planned to buy a new car.

“How couldn’t I be happy? Free money!” Qi, 40, said as he waited for his wife at a shopping mall in east Beijing. Now that those profits have vanished and his investments are locked up, he said they’ll “stick with the old car.”

— With assistance by Xin Zhou

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