Worries over China economy exaggerated, stock market plunge not an indicator - ADB chief economist

In recent weeks, many market players have raised concerns over China’s growth prospects, even calling for the Federal Reserve to postpone raising rates during the height of the turmoil, but one economist says these fears are exaggerated.

Asian Development Bank chief economist, Shang-Jin Wei noted in a commentary posted on Project Syndicate, that pundits say China may be losing its economic momentum, but he doesn’t think there is reason for such ‘dire predictions.’

“The volatile stock market and the renminbi’s ‘surprise’ depreciation are signs of imminent economic collapse, according to this view, as risky investments and high levels of government debt put the brakes on decades of turbo-charged output growth,” he noted.

However, he continued, there is little ground to believe such 'dire predictions', or that market fluctuations that have been driving recent panic represent anything more than short-term volatility.

Wei argues that equity-price swings are poor predictors of the real economic situation in China.

When Chinese GDP was strongly expanding during 2010-2013, stock prices were falling, he noted. Later on, he continued, Chinese stocks began to soar in the first half of 2015 while the economic slowdown began. Since hitting its peak in mid-June, the Shanghai Composite gauge has dropped roughly 39% to date and has market watchers concerned over China’s economic situation. 

However, Wei explained that the companies listed on China’s bourses are not representatives of the country’s firms.

The majority state-owned companies account for two-thirds of the market value of the country’s exchanges, for instance, though they are responsible for no more than one-third of Chinese GDP and an even smaller share of employment, he noted.

“The rise and fall of the Chinese stock market should also be understood in the context of Chinese households’ limited options for storing savings.”

He also said that regulators increased margin requirements several times in 2015, making it more difficult to purchase stocks with borrowed money, which could explain the drop in Chinese equities.

“And, as with all stock markets, shifts in sentiment that are not connected to fundamentals can also drive volatility.”

In Wei's view, China’s shrinking economic growth is a result of fundamental changes, rather than market sentiment, like less favorable demographics, a change in emphasis from exports and public investment to the service sector and domestic consumption, and lower demand from advanced economies.

If China keeps pursuing pro-market reforms, it will remain the biggest single-country contributor to global GDP growth over the medium term, "unperturbed by stock-market volatility. If reforms stall, falling stock prices are likely to be the least of China’s worries.”