China’s wildly swinging market: Don’t worry, it’s just novice investors playing with a lot of savings
By Farok J Contractor
The drop in Chinese stock threatens to produce a bearish environment around the globe. A long-term view suggests that fears of spillover effects and recession may not be justified.Instead, the world economy may actually benefit from China’s successful transition from an economy emphasising capital investment, exports and savings to one based on innovation, services and greater consumption. Investors should take the long view.
Until a generation ago, most Chinese were poor, and ancient proverbs made saving a virtue.For Mainland China, sudden affluence has not yet erased frugal habits of the past. Hundreds of millions in China grew up on noodles or rice, with tiny portions of meat. The parsimony of the past lingers in the nation’s unusually high savings rate. The average American household, depending on the US economy , saves 0-4% of its income. By contrast, typical Chinese households sock away about 30% of disposable income.Government is trying to encourage consumption, but changing millennia-old habits takes time.
The huge savings surplus must go somewhere, and families have limited choices for investing. Traditionally, gold or valuables were secreted underground. Chinese banks offer depositors a negative return, after factoring in that country’s 6% annual inflation rate. Real estate prices have either doubled or quadrupled in the past decade, and anticipation runs high that the bubble, too, may deflate. Ordinary Chinese cannot easily convert their local currency and invest outside China because of government capital controls. Chinese turned to the stock market. In early 2015, hairdressers in Shanghai or Shenzhen told customers how they had doubled their investment in just two months between February and May . By contrast, in the first half of 2015, the S&P 500 barely budged. The mania for a “quick buck” affected all levels of society.
The average American may be richer than the average Chinese citizen, but there are four times as many Chinese.With 1.32 billion people, the savings add up. The total value of investments in China’s stock markets can be as high as $10 trillion at peak levels and $6 trillion or less during downturns, according to CNN’s Sophia Yan. By comparison, the New York Stock Exchange market capitalisation was around $19 trillion in 2015.
China chases limited options for a lot of hoarded money . Most Chinese investors are novices, willing to take more risks than western investors. Such factors explain the wild swings in Chinese markets.
The gyrations have little to do with the economy’s actual fundamentals. A study by scholars at the Wharton School and Shang hai Jiaotong University concludes that, unlike other nations where stock market indices do correlate with future GDP growth, “The correlation between market returns and future GDP growth for China … is much lower and statistically insignificant.”
It may seem like a paradox then that Chinese traditions emphasise frugality while the culture and history laud risk-taking. Studies by Weber and Hsee concluded that when it comes to social interactions, Chinese are indeed conformist and risk-averse, yet in financial transactions bolder than investors in the West. China also has a long history of gambling.
Chinese brokers allow buyers to buy shares on margin, with borrowed money , fuelling the drive-up in prices. Axiomatically , when the tide of sentiment turns, margin calls – a requirement that the investor immediately deliver more cash to cover possible losses – accelerate the total market plunge.
A survey by State Street Corporation suggests that as many as 81% of Chinese investors trade at least once a month, by far the highest rate in the world. With speculative excess, millions including taxi drivers and tycoons play stocks to earn a quick yuan. The 2007 and 2015 crashes have not deterred new hopefuls from entering this game.
The Chinese economy is undergoing a difficult transition.Surveys suggest less than 10% of Chinese households had stock holdings in early 2015, and the likelihood is low that they could drag the world into a recession this year. Reports vary , with investment firms estimating stocks represent no more than 10% of China’s household wealth.Too much is being read into the slowdown in GDP growth in that nation. As emerging economies grow, their growth rate naturally slows, and China is still growing at an enviable 6% per annum.
Maturing attitudes among Chinese investors could mean greater stability in stock markets worldwide.
(The writer is a professor at Rutgers Business School. Copyright: 2016 YaleGlobal Online)
Not convincing at all.
I don’t invest in China anymore — I used to. I will not put a dime into China again until they allow their Renminbi to freely float. A cheaper Renminbi would be good for China’s debt-laden banks, sagging exports and foreign investment to China would increase again.
Chinese market may swing for some more time, until it stabilizes somewhere at middle….
Chinese are also a potent technological force now So even for manufacturing of the future – based on 3D printing, robotics, nanotech etc- Chinese are better poised than say India.
That is a fact, but we can catch up – we must.
Huge economy and any downfall of that can create havoc in global economies…
Chinese have the potential to damage the markets