Economists said that even if former Federal Reserve Chairman Alan Greenspan is correct that China’s stock market is headed for a “dramatic correction,” it won’t upset China’s economy or spread to other markets and economies around the globe, Bloomberg reports.
They said that China’s economy isn’t tremendously correlated with its stock market and note that while the number of brokerage accounts has climbed to 100 million, less than 10% of the population holds investments and stock holdings account for only 25% of domestic wealth.
“This is a relatively small casino,” said Edwin Truman, a former director of the international finance division at the Federal Reserve. “Even the implications for the Chinese economy should be minor.”
Harvard University professor Kenneth Rogoff expressed similar views, saying: “The Chinese stock market has only a tenuous connection with the underlying real economy.”
Similarly, the government has put a cap on the amount that foreign investors can hold in yuan-denominated shares at $10 billion. “The world economy is not particularly exposed to share ownership in China,” said Juan Jessop, chief international economist at Capital Economics. Further, economists said, if China’s economy remains strong, a falloff in its stock market won’t affect the rest of the world.
Last week, Greenspan said the doubling of the Shanghai composite index so far this year is “clearly unsustainable,” joining a chorus of voices that include Li Ka-shing, the richest man in Asia, and the People’s Bank of China Governor Zhou Xiaochuan.
Although a sharp decline in stock prices typically puts the brakes on a nation’s economy, that hasn’t proven to be the case in China; between 2001 and the end of 2005, the Shanghai Composite Index fell by half—but China’s GDP grew 46%.