China’s Bull Market Correlates Little with Consumption Uptick

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Wei Gu, China's Weak Wealth Effect. Wall Street Journal, June 22, 2015
http://www.wsj.com/articles/shan ... -economy-1434920557

Quotee:

"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.  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.

“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.

“In Asia, the wealth effect is strongest in Hong Kong, South Korea and Taiwan, where financial markets are more developed, and weakest in the Philippines, Indonesia and China, where stock-market participation is lower, according to HSBC Holdings PLC. In Hong Kong, a 10% increase in the Hang Seng Index raises private consumption by 1.1%, the bank found, whereas in China the effect is only 0.2%.

“China has 89 million investors with brokerage accounts for a population of 1.3 billion, according to the China Securities Depository and Clearing Corp., implying about 7% of the people are set up to trade stocks. Just 55% of the accounts held stocks on June 12. China’s mutual-fund industry still is small and people’s mandatory retirement savings are managed by the government, which invests the bulk in fixed-income products [ie, bonds].  In the US, stock ownership has dipped from the pre-financial-crisis level of 65% of Americans, but still stood at 54% in 2014, according to a Gallup survey. In Hong Kong, around a third of adults held stocks or had traded them in the prior 12 months, according to a recent survey by the Hong Kong stock exchange.

“Even in the US, many economists argue that home prices have a greater effect on consumer outlays than stocks. In China, investors have typically preferred real estate over equities, but a runup in apartment prices, followed by a recent cooling, has failed to significantly affect spending.

"The biggest influence on consumption—in both China and the US—appears to be inflation-adjusted wages [which is real growth--look up ‘real’ in economics, such as ‘real GDP’]. In China, real wage growth has been slowing over the past two years, to 6.4% in 2014 from 9.8% in 2012, as economic growth slows to around 7% annually from double-digit rates a few years ago.

Note: The online title of this report: Shanghai Stocks Offer Little Fuel for China’s Economy.