SHANGHAI-China’s stock market has tumbled this week after revelations of larger than expected capital outflows in 2015, compounding investors’ fears of a global economic slowdown and prompting questions about the health of the Chinese economy.
After a drop of more than 6 percent on Tuesday, the Shanghai Composite Index stemmed the flow somewhat on Wednesday with a 0.5 percent fall, finishing the trading day at 2,736 – its lowest level in 13 months. Tokyo’s Nikkei 225 rose 2.7 in comparison while Hong Kong’s Hang Seng finished 1 percent higher. That performance trails Wall Street’s rally on Tuesday.
“Stock market turbulence and uncertainly does tend to dampen consumer confidence among the huge group of private investors in China,” said Peter Williamson, professor of international management at the University of Cambridge’s Judge Business School, though he added he still doesn’t see this impacting the economy’s shift to a consumer-driven model at this stage.
“Many of those driving the growth in consumption, however, are young people who are less exposed to the stock market and may even benefit from moderating property prices,” he said.
More broadly, China’s gross domestic product growth is expected to slow further to 6.5 percent this year, down from last year’s 6.9 percent. Capital outflows jumped in December, with the estimated 2015 total reaching $676 billion, according to the Institute of International Finance (IIF), as money managers take out their money “in the face of concerns about a weakening currency”.
China has been relying on its $3 trillion-plus reserves to reduce yuan volatility following August 2015’s unexpected devaluation, though Williamson said the currency hasn’t rubbed off a lot on consumer spending at home.
“The yuan, which actually hasn’t fallen much compared to other global currencies that can move 2 percent or 3 percent in a day, doesn’t have a great deal of impact on domestic consumers, but it is likely to cause a slowdown in Chinese spending overseas, where many of the luxury purchases of luxury goods are made, especially if the yuan continues to weaken,” he said.
Michael Pettis, a former Wall Street trader and professor of finance at Peking University’s Guanghua School of Management has been pointing out the growing inequalities in China’s economy and predicted the China led commodities price collapse back in 2012.
Pettis points out that the current trajectory of China’s economy is following the examples of growing national economies throughout the 20th century, including the Soviet Union after its formation and Japan of the 1980s.
Like China, these countries’ governments artificially propped up investment in order to quickly grow and establish trade surpluses, before switching emphasis to a consumer-led economy.
Given what history has shown us from the development of other developing economies, China’s slowdown shouldn’t be a surprise, he argued.
“One of the things that really struck me was that during the miracle periods, at first when growth rates are really high, everyone is shocked. And then during the adjustment period, it slows so quickly, we’re all shocked. It’s always like that. We’re shocked on the way up and shocked on the way down,” Pettis said.