Beijing Olympics: 'Negligible' Economic Impact

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Historically, there has been little correlation between China's stock price movements and GDP growth because the amount of stock is too small to generate any wealth effect or financial repercussions that could affect the country's growth trajectory. For example, stock prices dropped by over 50% between 2001 and 2005, but GDP growth sped up from 7.6% to 9.9% in the same period. Also, the stockmarket had no wealth effect on its way up - the A-share price surge wasn't reflected in retail sales growth - and so should not have any negative wealth effect on its way down.

Banks and brokers cannot lend to equity investors, and no margin trading is allowed. So leveraged speculation and, hence, systemic risk to the domestic financial system from the market correction is limited. Finally, equity financing is still not prevalent among the private sector so changes in stock prices have had only limited direct impact on the cost of capital for the private sector.

There are also worries that China's property market might follow the stockmarket into a major slump, with dire economic consequences. Indeed, property prices in some major cities, first Shanghai and more recently Guangzhou and Shenzhen, have fallen sharply. Chinese banks have a much bigger exposure to the property sector than to the stockmarket, with most banks having about 30% of their lending to property developers and buyers. The property sector also has a strong spillover effect on other demand, including steel, cement, building materials, petrochemicals, home decorations and services, furniture, appliances etcetera. The knock on effect from a property market collapse could be big.

However, these concerns are overblown. Despite rampant speculation in some cities, there is no nationwide property bubble. In smaller cities property price increases have been much more muted. There is also no evidence that housing affordability is worsening overall. Chinese banks' exposure to mortgage lending has been small, accounting for about 11% of total loans. A collapse of the property market is, thus, not likely.

While not all of Beijing's measures are appropriate from a market perspective, the government has acted swiftly to curb property speculation by various means, like raising the down payment ratio, increasing property profit and sales taxes, raising mortgage rates and restricting buying and property development by foreigners. The first city that came under Beijing's anti-speculation attack was Shanghai, which saw its property prices fall in the period from mid-2004 to 2006. The more recent property price drops in Guangzhou and Shenzhen have been a result of both Beijing's austerity measures and a knock-on effect from the slowdown in exports, which account for 90% of GDP in the Guangdong province.

Finally, there is downside risk to GDP growth in the short-term, which is causing a macroeconomic policy conflict (high inflation argues for a tight policy bias, but growth risk argues for policy relaxation). Stubborn high oil prices add complications to China's economic environment. Until we see oil prices correct and stabilise and growth in the developed economies stabilise, there China's stockmarkets will see more volatility with a downward bias. Nevertheless, the long-term structure of the Chinese economy remains solid. And the Olympics? It is irrelevant in affecting China's economic and market outlook.

Chi Lo is a director of investment research at Ping An of China Asset Management (Hong Kong) .