By Lara Farrar
with contributions from Vicki M. Young
 on July 9, 2015

SHANGHAI — China’s tumultuous stock market may rock consumer confidence but should have minimal impact on actual retail sales in the medium to long term, according to retailers and analysts.

Instead, brands should be more concerned about the shift to consumption online and a growing number of e-commerce companies offering options to order products overseas — as well as a decline in demand for products from mass luxury brands.

“I don’t think that this will have a big impact right now,” Benjamin Cavender, a senior analyst with the Shanghai-based China Market Research Group, said. “We are going through a massive shift. There is more and more shopping online, more buying overseas and importing and then a move towards mass market shopping. The money to spend is still there, but brands need to really be paying attention to what the consumer is looking for and what they want to buy.”

Over the past several weeks, an inflated Chinese stock market has been on a roller-coaster ride with stock prices taking dramatic slides, the Chinese government halting new initial public offerings, and, most recently, hundreds of listed companies freezing the trading of shares on Wednesday to try to fend off further losses. Many institutional investors anticipated that the bubble would eventually burst, moving money out of Chinese markets ahead of the near free fall, which started in late June and has resulted in share prices in Shanghai losing a third of their value in recent weeks, Cavender said.

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Those who are likely hurt the most are investors who came late to the market, or in other words, Chinese citizens who know little about stocks other than a belief that Chinese markets were the new way to make a quick buck in a country where there are stories of millions of people who have gotten rich virtually overnight in industries ranging from real estate and manufacturing to information technology. The stock market was the new rags-to-riches dream.

“In the past several decades, stories like the overnight money boom are everywhere, and it does happen all the time,” Will Zhang, a 26-year-old entrepreneur and investor, said. “China’s stock market started the new round of boom. The snowball decline of China’s stock market and its possible chain reaction does draw more of my attention to the overall health of China’s economy. I am afraid if the government policies and regulations are not effective in saving the market, the panic and recession may spread to other areas.”

Zhang added that he doesn’t think economic worries are widespread, particularly among older generations. “People in my father’s generation have experienced more difficult times than this, and they have confidence in the government,” he said. “And for most of the people, I don’t think they have knowledge about either the stock market or the whole economic picture.”

Beijing has been trying to mitigate the market mayhem by lowering interest rates as well as infusing capital into the market and requiring major funds to purchase a certain number of shares. In recent weeks, many government attempts to halt the decline have been ineffective. Yet on Thursday there was a slight rebound in mainland and Hong Kong exchanges after the government stepped in this week with further efforts to prop up the market, including banning shareholders of major listed companies from offloading their holdings. Chinese media is also trying to paint a rosy picture, with major state-run news outlets publishing editorials stating that confidence is “more precious than gold.” Two newspapers based in inland China published reports on how villagers in the country’s interior who have invested remain confident in the stock market.

But strategists at Bank of America Merrill Lynch note that the stock market correction in China could spread beyond the equity market.

In a research note by strategists David Cui in Singapore and Tracy Tian and Katherine Tai, both in Hong Kong, they said the biggest damage caused by the stock market’s decline has been to investors’ faith in the government’s ability to manage asset prices for stocks, currency and even real estate. “The difficulty the government has faced to stabilize the stock market has demonstrated the downside of that faith. As a result, we expect many of these assets to be repriced lower going forward. Also, the ripple effect from the market correction has yet to show up — we expect slower growth, poorer corporate earnings and a higher risk of a financial crisis,” the strategists said.

While the strategists in their note questioned the implementation of government policy in urging people to buy stocks, they also said that the government started the de-leveraging process in the market “too late and without adequate preparation for the potential downside.” The fall in the market could possibly make the government more cautious toward quantitative easing, and potentially use the property or debt markets to hold up growth. Should any of these bubbles become more developed, how to deal with it would be more difficult than what’s happening in the stock market.

Further, the net result of market volatility is a transfer of wealth from people on the street to the wealthy who have already cashed out. “We expect this will likely hurt consumption down the road,” they noted, adding that the impact of a “full-blown financial crisis in China, if it materializes, on the economy would likely be severe.”

One trigger for a financial crisis in China, if the market continues to fall sharply, could involve “stock lending losses” whereby banks and brokers may have to bear a meaningful share. Those losses, which the strategists predict could run into the “trillions” of yuan, would have particular impact on brokers whose capital base is less than 1 trillion yuan.

How many ordinary Chinese have invested and how much they have potentially lost is a major question, according to Cavender, who noted that even though many more Chinese have decided to gamble on stocks, it is still a relatively small percentage of the country’s population. There may be a short-term psychological impact on consumer confidence, but it is unclear whether those hurt the most — likely individuals or families who borrowed money to invest in stocks that have dramatically decreased in value — match the profile of Chinese who consume foreign brands.

“No one knows how exposed a lot of people are,” James Rogers, managing director of CR-Retail, a Shanghai-based retail consultancy. “Because of the opaque nature of China, I think a lot of people are trying to connect the dots to see how many people are linked to this — not in terms of how they are actually contributing to the downturn but how people are exposed.”

Rogers added that retailers may go through a slight sales slump due to the market chaos and that they “should be cautious but not panic.”

“While the economy is going through some testing times, the long-term outlook is very positive,” he said. “Therefore retailers should not do anything in the short term, which could jeopardize the future growth of their China business.”

Godwin Lam, managing director of Trinity Group Ltd.’s China operations, which manages a number of high-end men’s wear labels, said sales have been down over the past couple of weeks but he thinks it will be short-term. Instead of fears over the stock market, Lam said he is more concerned about a growing trend in China where brands are offering sometimes deep discounts to offload surplus inventory.

“I think in the short term, the stock market will affect everything, including food and beverage, including retail, including real estate. Everything,” Lam said. “In the long term, I don’t think there will be any big impact. Chinese people have a very short-term memory. They will come back and keep spending. I am more concerned about brands that never offered any discounts before and now they have very big discounts. Either you follow them or you will be pushed out. So, in some sense, we have to give up the margins and follow the majority and go for topline growth.”

 

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