Even regulators are using the word “panic” to describe what’s going on in China’s stock markets.
And sure, the markets are very ugly. The Shanghai Composite has plunged 32% in less than a month. Its little brother, the Shenzhen Composite, has fared even worse. Beijing has tried very hard to stop the bleeding — but nothing seems to be working.
But take a deep breath. Here are a few very important reasons to remain calm:
1) Unless you’re reading this from China, you probably don’t have much invested in these markets. Foreigners own just 1.5% of Chinese shares, according to Capital Economics. That number is growing, but only very gradually.
2) Believe it or not, China’s stock markets are still higher than they were on Jan. 1. The sharp recent losses follow a long bull run. The Shanghai Composite is up roughly 10% since the start of the year, while Shenzhen is hanging on to a 33% gain.
3) Chinese have relatively little money invested in the stock market. Instead, most people keep their wealth in cash, deposits and property. Economists say that stocks make up only 15% – 20% of household assets, and that should help keep spending money in the pockets of consumers.
“There is going to be some damage, but the Chinese stock market is not as big or important as the U.S. stock markets is for the U.S. economy,” said Frederic Neumann of HSBC. “It’s not that every Chinese has a stock account.”
4) The vast majority of Chinese companies still have access to financing, which should keep the economy churning. Here’s what analysts at UBS said on the matter:
“The impact of stock market turmoil on domestic financing should not be exaggerated,” they said. “Equity has played a relatively small role in the financing of the real economy.”
5) What’s happening in China is not yet a “Lehman moment.” The banking sector is holding up well, and there is no indication that Chinese have lost faith in the overall economy. Beijing, for its part, still has policy tools at its disposal.
“Remember … the big banks are all owned by the Chinese government,” Neumann said. “They can in fact fine tune the economy through bank lending. They control the currency. They have vast government resources.”
“It shouldn’t undermine the underlying ability to control growth,” he added.
