Sunday, August 30, 2015

Economy: What Doesn`t Kill You........China After The Crash

(Drivebycuriosity) - "What doesn`t kill you, makes you stronger", said once Nietsche. I think this is also true for China.  There is a lot lamentation about China´s stock market crash. Pundits claim that the fierce drop of China`s stocks (about 40%) would hamper the Chinese economy and could even curb the global economy. I beg to disagree -  I think that the crash could make China´s economy a bit stronger.

The reason: The crash caused some counter movements which should rekindle the slowing economy.

1. China´s central bank responded to the crash and reduced interest rates again. They also lowered the reserves the banks have to hold there. Lower interest rates and more bank liquidity should create some tailwinds for China´s economy. Many pundits dismiss the expansive effect of the recent monetary step, but the expansive US monetary policy in spring 2009 got dismissed as well. 

2. Beijng also devalued the Yuan. China`s products got cheaper on the global markets which could help the exports.

3. The noise from China´s stock market crash & Yuan devaluation send oil and other commodity prices. Cheaper energy and other commodities create strong tailwinds for the Chinese & the global economy. Companies have lower costs and consumer more money to spend.

Peking University economist Christopher Balding has calculated, that the bailout (stock purchases with government money  ftalphaville) and stimulus measures announced since the Chinese equity panic in late June poured a total of $1.3T, or more than 10% of GDP, into the economy (seekingalpha)

The above explained 3 positive impulses are overcompensating the negative impulse from the stock market crash, the loss that China´s stockholders suffered. "The stock market wealth effect in China is smaller than many assume, as stocks represent less than 15% of household financial assets and equity issuance accounts for less than 5% of total social financing", explains writes Qu Hongbin, HSBC's chief economist for Greater China (businessinsider). "For the average household, consumption growth is driven primarily by income growth, not changes in wealth, according to Qu. Also, most households put their wealth in cash and deposits — not in stocks."

And China´s economy is still supported by enormous investments into railways, airports and other infrastructure and the massive reform program that started in 2013 (). In wouldn´t be surprised if China would overcome its recent soft patch and gain some speed through end of the year.

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