The Hang Seng Index has already tumbled over 6,000 points from its peak this year. Investors might have had their hopes too high and are now coming to terms with reality.
So what are the worst fears of market participants? Probably three things.
First, although China is now the world’s second-largest economy, with per capita GDP of US$9,000, which is close to the middle-income mark of US$12,000, Chinese on average are worse off than that.
Since infrastructure investment, exports and consumption data are all lumped into the computation, the GDP figure does not really tell us how strong or weak the private sector is. In fact, per capita disposable income might be a better indicator.
Currently, around 80 percent of Chinese earn less than 3,000 yuan (US$438) a month, far below the per capita GDP.
It appears that the public sector and state-owned enterprises are the main contributors to GDP. Also, the wealth gap continues to widen.
In such a situation, how could the economy fare well in the long run?
In July, Chinese authorities approved a bill to overhaul the mechanism for collecting social security levies.
The move drew attention to the heavy tax burden of individuals and companies in China, further raising the concern of investors.
Why the need to overhaul the system? It’s been reported that nearly of half of the provinces in China are suffering from a deficit in their social security funds. The situation is deteriorating fast, and the government has to do something about it.
Second is the intensifying trade war between the United States and China, which has exposed some of the vulnerabilities of the Chinese economy. Despite the rapid development of its tech sector, China is still heavily dependent on core technologies from overseas, such as chips.
If the US bans the export of core hardware to China, Chinese tech giants could be in trouble.
But the biggest fear is probably policy risk.
Beijing has shown great resolution to pursue its financial deleveraging efforts. At the same time, authorities are carrying out stringent policy moves targeted at various industries including mobile gaming, online shopping, healthcare and education.
Such moves have weighed on the share prices of many listed firms. The market was expecting policy support, but the government has tightened regulation instead.
As there is no telling when the policy upheaval will end, the Hong Kong equity market might get worse in the near term and its eventual recovery may take a long while.
This article appeared in the Hong Kong Economic Journal on Sept 19
Translation by Julie Zhu
[Chinese version 中文版]
– Contact us at [email protected]