Chinese stock market correction not so significant

Even after last week's bounce back, China's stock market is nearly 30% below its early June highs, with close to US$3trn of wealth destroyed, on paper. The Chinese stock market is still up nearly 15% in the year to date and 82% for the past 12 months. 

"Yet although the mark-to-market losses are striking, we do not expect a significant impact on China's economy," notes Barclays.

Moreover, we doubt that there is much of a wealth effect to begin with. Chinese households hold only a fraction of their wealth in the stock market; real estate is a far more important asset class, and high levels of household savings smooth out consumption patterns.

The 2007-08 boom and bust in Chinese equities had little impact on consumption, retail sales or industrial production. Moreover, capital markets are not a significant source of financing for China's corporate sector, on either the equity or debt side. Although the financial services sector contributed a not insignificant 1.4pp to Chinese GDP growth in 2Q1 2015, it is not big enough to detract sharply from Chinese growth, even if stocks drop further. 

We also find few signs of contagion to the Chinese banking sector. Although margin financing provided by securities firms and the 'shadow financing' sector played a role in the equity run-up, the total financing provided seems to be around 6trn yuan. By contrast, the Chinese banking sector has over 100trn yuan in assets, with very little margin lending exposure; the bulk is bank loans.