BEIJING — Steep slides of Chinese stocks in recent days are stoking global panic about the state of the world’s second-largest economy, with commentators ranging from Chinese state media to Donald Trump taking a doomsday view.
It indeed was a brutal day in Chinese markets Tuesday — and has been a very, very bad summer. But, while the plunge in China’s stock exchanges Monday and Tuesday signals big trouble, it does not mean things are about to collapse.
The problem is that investors seem to be reading what is happening in China’s highly volatile equity markets as a signal of the state of the economy as a whole — a mistake, experts say.
The two are linked, definitely, but not as much as those outside China seem to imagine. And the overall economy, though struggling mightily, is still showing some signs of life.
“Investors are overreacting about economic risks in China. The collapse of the equity bubble tells us next to nothing about the state of China’s economy,” Julian Jessop, chief global economist at Capital Economics, wrote in a note to clients Monday. “The recent data from other major economies have generally been good and there is little to justify fears of a major global downturn.”
“Many of the market’s substantive worries (economic collapse, financial collapse, competitive devaluation) are overblown,” echoed Arthur Kroeber, managing director of Gavekal Dragonomics, in his own note to clients. “But markets trade as much on policy signals as on economic reality, and there has clearly been a breakdown of communication between Beijing and the rest of the world.”
That breakdown is mostly about how China’s government plans to manage the economy going forward — a question that increasingly affects the world.
China knows it needs to undergo a fundamental economic transition, moving away from pumping money into heavy industry, infrastructure investment and the property market and toward services, consumer spending and tech — a shift that will bring slower growth.
The trouble is, authorities seem unwilling or unable to let the “new normal” take hold. Their efforts at change have been piecemeal and halting — they took steps on the currency, for instance, but have yet to move ahead with promises to truly shake up state-owned enterprises.
When the stock market started to slide this summer, the government stepped right in, turning to a series of extraordinary measures, including forcing big investors to buy stock and freezing initial public offerings.
This week, it has taken a more hands-off approach, steering clear even as the markets tanked.
The lack of a clear strategy has rightly spooked investors. “It’s a matter of confidence,” Wei Wei, an analyst at Huaxi Securities in Shanghai, said on Tuesday. “China’s economy is not really as bad as people imagine, but people are overreacting. The decline of the stock market reflects people’s expectations.”
Indeed, the picture is not altogether bleak.
The link between China’s stock market and its real economy is relatively weak, especially compared with the United States — a short-term strength, experts say, even if it points to long-term weakness.
“The good thing is that the meltdown of the stock market is unlikely to result in systemic risk to the banking sector, investment,” said Xu Sitao, chief economist at Deloitte China. “But if China wants to go back to a more sustainable growth trajectory, we really need a far more functional market.”
A relatively small, wealthy proportion of Chinese people have exposure to the stock market and, though margin lending has increased among retail investors, the average Chinese household still saves a lot.
Zhao Longkai, executive director of the MBA program at Peking University’s Guanghua School of Management, said the impact on retail investors does not seem as big as during the last crash.
“I don’t think ordinary investors are so concerned this time,” he said. “If I look around and talk to people, some people have lost a little bit, but it’s much better than eight years ago.”
Also lost amid the talk of collapse is the fact that, despite real and worrying problems, China’s economy is still making gains.
There is a debate about how fast China is growing — the government predicts 7 percent growth in gross domestic product, but some experts say the true figure could be as low as 4 or 5 percent. Even if the figure is near the lower end of that range, it is growing still.
China’s industrial sector is struggling badly, but there have been positive signs in terms of services and consumption — the very sectors China hopes to develop.
The latest data shows the services sector has become the biggest driver of economic growth in China, expanding 8.4 percent in the first half of the year and accounting for 49.5 percent of GDP, according to government statistics — which, while not perfect, are generally thought to give a sense of trends.
China’s retail sales grew 10.5 percent year on year to 2.43 trillion yuan, or $383.8 billion, in July, slightly down from 10.6 percent growth recorded in June. In the first seven months of this year, retail sales grew 10.4 percent, according to the National Bureau of Statistics.
On Monday, Apple chief executive Tim Cook weighed in, saying in an e-mail to CNBC’s Jim Cramer that, from his perspective, things are still looking good.
“I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August,” he wrote. “. . . Obviously I can’t predict the future, but our performance so far this quarter is reassuring.”
He added: “I continue to believe that China represents an unprecedented opportunity over the long term.”
Simon Denyer, Xu Jing, Gu Jinglu and Xu Yanjingjing contributed to this report.