The tug of war between growth and policy reflation will remain the dominant theme this year, in which weak growth numbers will force policymakers into more aggressive reflation efforts. This is already turning out to be good news for stock prices. Indeed, even though the equity market in China is far less important than in developed countries, rising stock prices will still offer important benefits for the economy.
Rising stock prices increase household wealth and boost confidence, which in turn supports consumer demand. This could be true everywhere, but may have just started to become relevant for China, given the rapid increase in investors’ participation in the equity market in recent years. The numbers of investor accounts in the Shanghai Stock Exchange recently hit 125 million, almost triple the level in 2007 during the previous equity mania. This amounts to over 16% of the urban population, compared with a mere 6% eight years ago. Meanwhile, there has been explosive growth in investment funds in recent years, which has also increased households’ exposure to the equity markets.
The chart above shows that consumer confidence has surged to its highest level in recent years, a highly unusual development considering the weak growth environment. We suspect this has to do with the sharp rally in stock prices and growing participation in stock equity investment. Rising consumer confidence will eventually benefit retail sales.
From policymakers’ perspective, however, a much more important consideration is the funding mechanism of the stock market.