A silver lining in China monetary easing policies: HSBC

HONG KONG – The stock market wealth effect of falling markets in China is smaller than many assume, says HSBC, because stocks represent less than 15% of household financial assets – and equity issuance accounts for less than 5% of total social financing.

So while the volatility of China’s equity market has dominated the headlines, from a macro-economic perspective, the known balance sheet channels are still quite limited, given the early stage of the market’s development.

“The wealth effect is quite elusive as household asset allocation in the equity market as a share of their entire wealth is small, HSBC says in a research note. “Corporates are not reliant on it as a source of financing. and a very large part of the banking sector is not imminently linked to the equity market.

“But Beijing seems to be determined to prevent a market freefall.

“Apart from the impact on sentiment, a sharp correction increases the risks to financial stability through contagion effects. Such risks are never worth taking.

“Therefore, we believe the measures being taken are both necessary and timely in order to forestall negative spill-over effects.

“As economic activity data remains weak, we continue to expect more monetary and fiscal easing measures in 2H, including a 25bp policy rate cut and 200bps of reserve ratio cuts.

“The additional silver lining is that, if history is a guide, there will be sizeable deposits flowing back into the banking sector as the asset rally cools down. This may help improve the transmission impact of monetary easing.”  www.hsbc.com (ATI).