Even after a slump last week, China’s benchmark stock index has more than doubled over the past year, but there is no sign that investors are splurging with their profits to help the sagging economy.
In developed markets like the US, rising stock markets sometimes boost consumer spending and help spur growth. But in China, that effect appears to be nonexistent. The Shanghai Composite Index has jumped 122% in the past 12 months, but retail sales increased just 10% year on year in May and April, the slowest rate of growth in five years, MarketWatch reported.
The reason? At the most, one in 15 Chinese trade stocks, compared with more than half of Americans. That means that much of the gains in equities are made by wealthier Chinese, who have money to put into the markets but are more likely to save profits than spend them. And those who do own stocks appear to be deferring spending, so they can invest more in the markets, especially since recent history shows that rallies can be short-lived.
Friday, the market fell 6.4%, taking its loss for the week to 13%.
“Chinese investors tend to believe the bull market is short but the bear market is long,” said Helen Qiao, Morgan Stanley’s chief economist for China. “As they become busier trading stocks, they also have less time for shopping.”
Market Upturn
The recent market upturn follows a long spell in the doldrums for Chinese stocks after a sharp correction in 2007. Lots of investors lost money in the downturn, reducing interest in the market. Momentum only began to build again last year, fueled by low interest rates and moves to allow greater foreign investment.
While the rally has done little to help consumption, it could hurt spending in the event of a market collapse. That is because much of the recent buying has been with borrowed money. Margin debt as a percentage of China’s stock-market capitalization is now higher than on the New York Stock Exchange. If the market’s downturn continues, investors may have to rein in spending to repay loans.
Agents at luxury-car showrooms in Shanghai say wealthy customers are delaying purchases to invest more in the stock market. Auto sales fell by 0.5% from a year earlier in April, the first decrease in almost three years. Fewer than a quarter of respondents to a recent survey by online news portal Netease said they would consider using gains from the stock market to buy a car.
Instead of buying a new vehicle, “some people have decided to lease a car for the first time so they can keep investing,” said Shaun Rein, managing director for China Market Research, a consumer-intelligence firm.
