英文原文：Impact of Stock Bubble Burst: An Update
Renewed fears of stock bubble bursting
We published a note on May 28 asking the question, “What is the risk to China’s economy if the A-share market bubble bursts?” The Shanghai A-share composite index has surged by 60% from the lows reached in the aftermath of the stamp duty hike on May 30 and now hovers around the 6,000 level. The average trailing P/E reached a historical high of 64 times in September. Against this backdrop, fears of serious consequences from a potential bursting of the stock market bubble appear to have re-intensified in recent weeks. In this context and with acceleration of property prices, similar concerns have been expressed by clients about the impact of a major correction in property prices. Investors are especially concerned about the potentially serious real economic impact of a negative ‘wealth effect’ on household consumption, the financing channel for corporate investments and banks’ balance sheets. I examine two scenarios under which the stock market plunges by 30% and 60%, respectively, in a relatively short period. Based on investor feedback, there are orders of correction that could trigger different degrees of concern about the implications for the wider Chinese and even global economies. Since the paucity of data prevents us from conducting a thorough or precise simulation of such a scenario, we rely on officially published data and make several rather strong assumptions with a view to gauging how bad things could get.
Emerging ‘wealth effect’ on personal consumption
We estimate that Chinese households had about Rmb64 trillion in assets （i.e., about 264% of GDP） by end-September 2007, of which about 13% （i.e., Rmb8.6 trillion, or 35% of GDP） are in the form of stock holdings and 55% （i.e., Rmb35 trillion, or 144% of GDP） are in the form of property. China’s headline stock market capitalization stood at about Rmb26 trillion at end-September, but only about one-third of this is actually ‘marketable’, i.e., available for investment by retail investors. The rest remains held by a small number of large shareholders （mostly the state）. In other words, household exposure to the stock market is much smaller than that suggested by headline stock market capitalization.
The value of households’ stock holdings as of end-September reached Rmb8.6 trillion, an increase of 240% from end-2006, of which, I estimate, 60 percentage points were contributed by the rebalancing of households’ financial asset portfolios from bank deposits to stock holdings and 180 percentage points were contributed by market appreciation. Such a massive increase in household financial wealth, which amounts to about 12% of GDP by my estimate, should in theory generate a substantial wealth effect that helps boost consumption.
Although we do not have sufficient statistics to make a reliable quantitative estimate of the exact magnitude of the wealth effect, we do find some anecdotal evidence suggesting an emerging wealth effect. Specifically, in the past, household income growth has consistently and significantly lagged real wage growth; however, income growth started to outpace real wage growth by a large margin this year. Real consumption growth has followed a trend similar to that of real income growth. Moreover, sales of luxury and high-end consumer discretionary goods have been strong and have accelerated this year, suggesting that the wealth effect underpinned by the extraordinary stock market performance may have played a role.
Potentially significant impact on consumption
A typical concern about the fallout from a major stock or property market correction is the impact of the negative ‘wealth effect’ on household consumption. Households that hold stocks directly or indirectly through mutual funds feel poorer when the stock market falls. This can result in a decline in current consumption.
We look at two scenarios under which the stock market plunges by 30% and 60%, respectively, in a relatively short period. I estimate, under the first scenario, that were the stock market to plunge by 30% from current levels, the value of households’ stocks would, ceteris paribus, shrink to Rmb6 trillion. With the value of other assets unchanged, total household financial wealth would decline by Rmb2.6 trillion, or about 11% of GDP. Under the second scenario, were the stock market to plunge by 60% from current levels to the level reached in the aftermath of the stamp duty hike in late May, the value of households’ stocks would, ceteris paribus, shrink to Rmb3.4 trillion. With the value of other assets unchanged, total household financial wealth would decline by Rmb5.1 trillion, or about 21% of GDP.
To determine how such a decline in household financial wealth might affect consumption, we need one important parameter – the ‘marginal propensity to consume out of wealth’ （MPCW）. As we did in the previous study, we use estimated MPCW for the US – which is around 4% based on academic literature – as a proxy, given the extreme difficulty of estimating this figure for China, due to poor data quality and availability. In other words, we assume that every Rmb100 decline in stock wealth will lead to a Rmb4 reduction in consumption. I would caution that we view the MPCW of 0.4% as a high-end figure for China, given US households’ greater propensity to consume in general and the highly developed financial markets in the US – which make it much easier to translate financial gains into cash income.
Based on an MPCW of 4%, we estimate that the direct negative wealth effect could, ceteris paribus, cause personal consumption and GDP to decline by 1.2% and 0.4%, respectively, if the market were to drop by 30% from the current level, and by 2.4% and 0.8%, respectively, if the market were to drop by 60%. Furthermore, under the second scenario （i.e., a drop of 60%）, if the bursting of the stock market bubble were to have a contagion effect on the property market, causing average property prices to fall by, say, 10%, it would add Rmb3.5 trillion to the loss of household wealth. In that event, we estimate that the overall direct negative wealth effect could, ceteris paribus, cause personal consumption and GDP to decline by 4% and 1.4%, respectively.
Clearly, the negative impact of a potential market correction at the current juncture has become substantially larger than five months ago, although it still appears broadly manageable by China’s double-digit growth standards, in my view. Moreover, I should point out that we estimate only the direct impact, and in practice there would be second-round multiplier effects that would amplify the ultimate impact. Nor do we assume any policy reaction in our estimate, while, in practice, policy makers may well react with various measures that would effectively mitigate the impact.
Moderate direct impact on investment
Investment would be negatively affected by a bursting of the stock market bubble through two channels: 1） If the underlying final demand （e.g., consumption） weakens due to a negative wealth effect, investment would be cut back due to a less favorable outlook; and 2） a bursting of the stock market bubble would halt the market’s function of capital raising. The first has to do with the impact on final consumption from a negative wealth effect, which we addressed in the previous section. Regarding the second, I do not believe that a correction of the stock market by 30% or even 60% from current levels would change the desire of Chinese companies to invest now for the purpose of a public listing in the future.
Since my view on this particular point has remained unchanged, the paragraphs below are based on the relevant section in our previous note with updated data （see China Economics: What Is the Risk to China’s Economy if the A-share Market Bubble Bursts, May 28）.
The theoretical counterpart to the ‘wealth effect’ on consumption is the ‘Tobin’s q theory’. According to this theory, a firm will invest if the stock market’s valuation of new capital addition （or investment） to the firm is higher than the actual replacement cost of the capital. Tobin’s q is the ratio of market valuation of the capital to its actual replacement cost. When q is greater than one, investment is worthwhile and encouraged. For example, if a firm has an investment project that costs Rmb10 million and the completion of the project will increase the overall market value of the firm by Rmb12 million, it makes sense for the firm to carry out this investment, as it creates an additional Rmb2 million of market value. As such, a booming stock market encourages investment; conversely, a plunge in stock market prices tends to lead to a contraction in investment.
However, we believe that a 30% or even 60% correction in the stock market from current levels would be unlikely to have much of an impact on fixed-asset investment in China. First, we argue that the value of Tobin’s q in China is always substantially greater than one regardless of the performance of the stock market, mainly reflecting the low replacement cost of capital goods in China. The financing costs of investment projects （e.g., the interest rate on the bank loans） are kept substantially below the market-clearing level. The binding constraint on investment decisions is usually not the cost of capital but the availability of bank loans. Reflecting low interest rates, there is always strong demand for investment, generating the tendency for over-investment. While a booming stock market should drive Tobin’s q far above one, a 30% or even 60% decline in the stock market from current levels would by no means take it below one, in our view. Put another way, we do not believe that Tobin’s q is a binding consideration when investment decisions are made in China. This explains in part why approvals of IPOs in China are still tightly controlled and even rationed.
Second, as a source for investment financing, the amount of capital raised directly from the stock market remains very small. In 2006, only slightly over 2% of total financing for fixed-asset investment came from the A-share market. Although this ratio has increased substantially in the first eight months of this year, it is still very small. This suggests that even if stock market financing is shut off completely in the wake of a correction, corporate investment financing conditions would not deteriorate significantly, as long as other channels of financing remain open.
In fact, at the current juncture, there could be a rather perverse outcome: A bursting of the stock market bubble may make more funds available for investment in physical assets. With expected returns from investing in the stock market substantially and persistently higher than those from traditional investment activity, firms may have channeled the funds that would otherwise be used for fixed-asset investment into the stock market. A bursting of the stock market bubble should help firms to refocus on and make funds available for real and productive investment activity.
My view on the other impact of a bursting of the stock market bubble （e.g., banking sector, social and global） remains broadly unchanged （see China Economics: What Is the Risk to China’s Economy if the A-share Market Bubble Bursts, May 28, and China Economics: An ‘Untimely’ Question: What Could Go Wrong with the Economy? July 23）.
In particular, I continue to believe that the impact on bank balance sheets will likely remain manageable for the reasons I discussed in two previous notes. I would become more seriously worried if bank loan growth started to get out of line with the underlying real activity, as this would indicate that some funds from the banks are somehow being channeled to the stock market, even if there is no clear evidence that funds borrowed from banks are invested directly in the stock market. This is because money is fungible: Banks could still be indirectly exposed to the stock market if the corporate sector invests its own funds in the market and simultaneously increases borrowing from the banks for other ‘legitimate’ purposes. In this regard, I have not detected a disconnect between the growth rate of bank credit and that of real underlying activity. At the same time, I shall remain vigilant on this front, as cross-country experience suggests that the longer the bubbly stock market lasts, the more exposed the banking sector will likely become.
This type of exercise is rather crude, and our estimate is subject to considerable uncertainties due to paucity of data. Nonetheless, it illustrates that the potential impact of the bursting of the stock market bubble will increase substantially if the market continues rising rapidly. We shall keep a close eye on stock market developments and their impact on the real economy and convey to clients our regular updates on the potential impact of the stock bubble bursting.