China's Cure Is Worse Than the Cold
Why the country's market rout matters and why it doesn't.
The Chinese government's scramble to prop up its stock market in the face the recent mass sell-off could prove more damaging than the rout itself. Had Beijing not intervened, the sharp drop in share prices would have probably had a limited impact on the "real" economy. The government's actions cast doubt on its willingness to cede control in more important markets: credit and currency. A stalled reform agenda on these fronts risks further buildup of excess capacity and debt in the economy and undermines efforts to rebalance to a more sustainable growth model. And by staking its reputation on halting the sell-off, the government risks a crisis of confidence, which could undermine the efficacy of future policy moves aimed at stoking growth.
No Major Threat to Consumer Spending
Judging solely by the oft-quoted claim that China's stock markets saw $4 trillion in wealth wiped out in mere weeks, one might figure that Chinese household finances would be in dire straits. The drop in equity market capitalization in the month following the June 12 peak was equal to nearly 40% of China's GDP. While technically accurate, the $4 trillion in wealth destruction overstates the blow to Chinese household finances and, in turn, the threat to consumer spending.
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