China Stock Slump Set to Drag on Growth

Commuters in the Pudong Business Area of Shanghai as Plenum Concludes

Pedestrians walk past buildings in the Lujiazui district of Shanghai.

Photographer: Qilai Shen/Bloomberg
  • Economists see 0.1 to 0.3 percentage-point drag on growth
  • Some form of support for the stock market is likely: survey

China’s tumbling stock market is set to join a trade slump and sluggish factory conditions as a brake on economic growth this quarter.

A plunge that has seen the Shanghai Composite Index fall 18 percent this year will reduce first-quarter gross domestic product growth by 0.1 percentage point to 0.3 percentage point, according to the majority of economists surveyed by Bloomberg News this month.

"A minor drag from the stock market rout on GDP growth has to be expected," said Frederik Kunze, a Hanover, Germany-based economist at Norddeutsche Landesbank. "We will also see adjustments in the more and more important service sector."

That’s because lower trading volumes dent revenue for the nation’s finance sector, which emerged as a key growth driver last year. As that adrenaline shot fades, the economy will be more reliant on the boost offered by increased fiscal support and monetary easing, the latest of which came last week when the central bank lowered the reserve requirement ratio for major banks.

"While I think the latest RRR cut may be partially due to the tumble in the equity market, we don’t think equity market performance is the key parameter to drive monetary policy," said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. He said the impact on growth from a negative wealth effect should be limited.

Still, with exports tumbling and conditions still deteriorating for the nation’s factories, economists do forecast additional easing. They’re expecting a 25 basis point cut in the benchmark lending rate to 4.1 percent and a similar reduction to the savings rate to 1.25 percent before the end of the year, while the RRR will fall by 50 basis points each quarter to 15.50 percent, according to a separate survey of economists.

GDP will grow 6.7 percent this quarter and 6.5 percent in the full year, according to analysts’ median forecast. That would scrape into the government’s targeted range of 6.5 percent to 7 percent, formally announced on Saturday by Premier Li Keqiang.

As for the stock market, economists do anticipate some support, even after past steps like the circuit breaker policy reversal in January only seemed to make matters worse. Still, the response may not be as heavy handed as measures last summer.

"Instead of stepping in directly, the authorities may introduce some policies which are helpful to the markets’ long-term development," said Meng Ding, an analyst at the Bank of China in Beijing.

While state support has helped stabilize stocks -- with the Shanghai benchmark reversing losses Tuesday to close higher for a sixth-straight session -- it remains among the world’s worst performing markets this year.

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