Stock market volatility likely to persist: Analysts

As investors, world markets, analysts and the Chinese government look to see if Chinese stocks will continue the bounce they had for two consecutive days at the end of last week, financial analysts in the US said the market remains volatile and they are wary of declaring it stabilized.

Aided by a torrent of government support measures, the CSI300 index of the largest-listed companies in Shanghai and Shenzhen rose another 6 percent on July 10, while the Shanghai Composite Index gained 5.4 percent. On July 9, efforts to stem the plunge started to gain traction when shares rose around 6 percent.

"Even with the bounce of those two days there is still a lot of volatility in the market," Kim Schoenholtz, a professor in the economics department at New York University's Leonard N. Stern School of Business said in an interview. "About half of the shares in the market aren't trading. Even if the government actions haven't restored stability, at least the market isn't plunging."

"The market got the message that the government is determined to stop the slide in the market. Yes, there will continue to be volatility, but the worst is over," Sung Won Sohn, a professor of economics at California State University Channel Islands in Camarillo, California, said in an e-mail.

China's government and regulators have taken extraordinary measures to shore up the stock market. China's top brokerages agreed to purchase $19.3 billion worth of shares backed by funding from the People's Bank of China and margin selling has been curbed. A report from Bank of America Merrill Lynch's said that $13 billion flowed into Chinese equity funds in the week ended July 8, the highest amount ever, with most of the money going into A-shares that are reserved for local Chinese investors.

Writing in their blog moneyandbanking.com, Stephen G. Cecchetti a professor of international economics at Brandeis University in Waltham, Massachusetts, and Schoenholtz, noted that China's stock market is now the world's second-largest behind the US in terms of market capitalization of domestic issues.

"In the year to June 12, when stock prices peaked, valuations on China's domestic exchanges skyrocketed, rising by more than 150 percent. However, in the past few weeks, prices have plunged, wiping out about $2 trillion of market capitalization. Nevertheless, equity valuations remain at roughly double the year-ago level. All of this extraordinary volatility has occurred despite intensifying efforts by Chinese policymakers to stabilize the market," wrote Cecchetti and Schoenholtz.

"In a large market like China's you are dependent upon the behavior of private investors. It's hard for government action to lead to stability," Schoenholtz said. "The success of China's stock market will depend on the government being able to tolerate volatility."

Sohn believes the government needs to become less involved now. "The government should step back and let the market do its work unless disorderly conditions come back. We tend to focus on the recent setback. But the overall market is still up about 70 percent from a year ago and the best performing market in Asia. Isn't that good enough?" he said.

In looking for clues to the impact the stock market turbulence may have on China's economy, economists note that the market doesn't represent a major part of the overall economy.

"It's not clear that the market is that big a part of the Chinese economy," said Schoenholtz.

"The recent setback in the stock market should have minimal impact on the overall economy. Only a very small fraction of the Chinese economy is affected by the market," said Sohn.

Writing for the online magazine Slate, Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, also discounts a serious shock to the Chinese economy from the market chaos.

"Consumption is only 36 percent of its GDP (gross domestic product)-literally half that in the US, where consumer demand growth has been more than halved over the post-bubble period of the past seven years. While speculators who were borrowing on margin to buy stocks will undoubtedly feel pain as the Chinese bubble bursts, these impacts are likely to be limited. China, with its still-embryonic consumption sector, and without an American-style overhang of household debt, is unlikely to suffer from the wrenching balance-sheet recessions that afflicted the United States and Japan," Roach said.

Last week, Olivier Blanchard, the International Monetary Fund's economic counselor and director of research department, said the stock market plunge will have little effect on the world's second-largest economy.

"The bubble has burst…. And that's potentially worrisome. How worrisome is it? We don't think very much," he said, explaining that the capitalization of the Chinese stock market in the GDP is much smaller than in countries such as the US, therefore less effect on the overall economy.

"My sense is that Chinese people should be used to the wild gyration of the stock market. This is not the first one. It may not be the last one. So I think it's very much a sideshow," he said.

paulwelitzkin@chinadailyusa.com