Daily Management Review

The Collapse of Chinese Stock Exchanges Will Not Stop the Economy's Growth


09/08/2015


There is simply no reasons to fall in the gloomy predictions about the prospects for China's economy, believes the chief economist of the Asian Development Bank Shang Jin Wei.



There is simply no reasons to fall in the gloomy predictions about the prospects for China's economy, believes the chief economist of the Asian Development Bank Shang Jin Wei.
 
In his article on the Project Syndicate the economist notes that the fluctuations of the stock market is a rather poor indicator of the economic situation in China.
 
- China's GDP growth slowed down mainly due to fundamental changes in the economy, such as the deterioration of the demographic situation, the reorientation of the domestic market, a decrease in demand from the advanced economies.
 
Further sign of the Chinese economy’s weakness is the decline in exports and investments in the first half of 2015. At the same time, other equally important indicators, such as retail sales and housing construction, have been continuing to grow.
 
And, perhaps most importantly, the labor market in the country remains healthy. The first half of 2015 has created more than 7.2 million new urban jobs, many of which are in the service sector. Meanwhile, wage growth remains strong and continuous.
 
China's growth rate this year may be lower than 7%, but I do not believe that eventually they will be very far from the government objectives "around 7%".
 
The volatility, faced by investors, is associated with the peculiarities of China's stock market, rather than with the basic economic fundamentals of the country. In contrast to the stock markets in the US and Europe, the Chinese stock exchanges dominated by retail investors, who primarily pursue short-term goals and participate in trade impulse, thereby exacerbating the volatility and creating a large gap between the prices of capital and real economic growth.
 
Moreover, companies, listed on Chinese stock exchanges, do not represent corporate sector. For example, the majority state-owned companies account for two-thirds of the market value of the stock markets of China, while they generate only one-third of GDP and an even smaller share of the jobs.
 
Rise and fall of the Chinese stock market should also be understood in the context of disability of the Chinese households to accumulate savings. The price increase occurred at a time when interest rates on deposits were officially limited. When the alternatives are few and provide only low incomes, capital market is more attractive, especially if major publications publish articles about the rapid increase in the shares of companies that are listed on stock exchanges.

original by Shang Jin Wei, Project Syndicate






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