The recent slump in Chinese markets has set off alarm bells across the world as indexes in the world’s second largest economy had soared this year.
China’s stock markets either under-performed or matched expectations when its economy was booming and began to surge when the economy started to show signs of a slowdown since the second-half of last year, showing the apparent disconnect between the economy and the stock markets, said Olivier Blanchard, chief economist at the International Monetary Fund.
Though the Chinese stock markets lack depth, they are not quite a casino. It went up 150 percent in the last year, which far exceeds any realistic assessment of the increasing dividends that shareholders could hope for. The bubble has burst, but only in parts, and it’s unlikely to have much effect on the Chinese economy.
The stock market capitalization versus GDP in China is about 20 percent, which is much lower than in the US. Due to the sudden surge in stock prices, people didn’t have much time to spend the wealth that arose due to capital gains.
The recent crash may have some effect in spending/consumption, but not much to worry about the economy’s overall health. Investors should rather focus on the underlying economy and the intentional slowdown brought over by the end of the country’s fabled credit boom and the housing boom. That said, if investors leave aside the stock market, China is doing okay. One could always worry about things getting worse, but things don’t look that bad going forward, he noted.
Asked if he worries at the failure of Chinese policymakers in fighting the sharp slide and the serious questions that are being raised about their credibility and the efficacy of their policies, Olivier answered in negative.
When a country has an exchange rate that moves very quickly, it’s always hard to handle quick stock price movements because nobody is sure about how they would react. If policymakers take their hands off, it may lead to enormous price movements in the short run. So, policymakers in such cases want to intervene and slow down the adjustment process, but not eliminate it completely.
The intervention may not always give the desired results and it has been witnessed many times in many markets across the world. It’s always difficult to slow down a bubble burst, though it can be done. Going by the recent developments, it looks like China’s experiment has been largely successful though it took a while, he concluded.
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