Does the Chinese stock market crash matter?

CHINA FINANCIAL - In Brief 08 Jul 2015 by Michael Pettis

· It is hard to argue that the stock rally had any significant positive economic impact, so some analysts argue that it collapse will not impact the economy either. · This may be true in a direct sense. But there are three important ways the stock market decline might matter. The first is direct. The combination of the rally and the crash may represent a significant shift in wealth from poorer Chinese to richer Chinese. This must cause total consumption to drop, although the amount will depend on the magnitude of the shift, of which we have no information. · Second, and indirectly, if the market crash causes perceptions of economic uncertainty to rise, households might respond by cutting back on consumption. · Third, and also indirectly, if the crash undermines Beijing’s credibility, or confidence in its ability to manage the economy, it could undermine the financial sector, which relies very heavily on the high credibility Beijing enjoys. This is the least likely but most damaging potential impact. · Of course the longer it takes for Beijing to stabilize the market the more its credibility is likely to be undermined. In a worst case scenario Chinese households may blame their losses on their having invested in the stock market because of what is widely perceived as very active cheerleading by policymakers.

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