A big surge, then big volatility, in the equity market
China’s equity market has experienced a massive boom and more recently
a significant selloff. Starting one year ago, the Shanghai Composite index
soared 135% to a high of 5166 and the Shenzhen index 170% to 3141. Over
the past 4 weeks, these indices fell 25% and 38% respectively, though they
rebounded late last week and are still well above levels a year ago.
Multiple channels of (modest) impact on the real economy
In addition to the direct contribution of frenzied equity trading to financial
sector GDP, the market boom and slump could affect economic activity via
1) wealth effects on consumption, 2) spillovers to housing markets, 3)
influence on broader financial conditions, and 4) confidence and
“uncertainty shocks”. However, our estimates suggest most of these
indirect effects should be fairly small (exhibit below).
Growth very weak in early 2015, but recovering somewhat
Economic growth has been very weak so far in 2015—indeed, it showed
little obvious benefit from the market boom. The primary forces acting on
real growth are shifts in fiscal policy and broader financial conditions, as
well as external demand. We expect continued efforts at policy support to
underpin growth and keep official full-year real GDP growth close to the 7%
target.