Market slump expected to have few ripple effects

As a result, the slumping stockmarkets in both countries are a cause for concern. Over the past two years, sections of the urban middle classes in China and India have been consumed by a fever for buying shares. Yet middle-class Indians have watched the market fall by a quarter from its peak and the Chinese by almost half. 中国华尔街博客空间{NG:qu dJ

The bad news is that both countries have large groups of disgruntled investors whose enthusiasm for stockmarkets has – at least in the short-term – been dashed. The good news is that it is having only a modest impact on the economy. 中国华尔街博客空间Mh)PeJJ

]*l,DiC M)hl7c0In the US, a 44 per cent drop in stocks such as the one currently experienced in China would severely hurt the economy, but China is so far taking the blow in its stride. Even after the huge day-trading boom last year, when lines formed every morning outside brokerage offices, equity culture is still relatively shallow – there are probably only 10-20m active investors.

jln5Z Q0The peak in opening share trading accounts was May last year and by the time the market reached its all-time high in October, enthusiasm had already waned. Moreover, the mainland market is up more than three times from its low in 2005, meaning many investors are still sitting on profits. 中国华尔街博客空间XaXX+j

“So far I have only lost the profit I made from speculating last year,” says Huang Liying, a Shanghai office worker in her 30s who began investing in February last year. “It is like I am back at the beginning again.”

+|G)ba#a;j7h9Z%[0Most of all, the surge in the market was so rapid that it did not translate into a strong effect on spending. “Consumption responded belatedly and only modestly to the rise in stock prices, so the potential pullback in spending will be limited,” says Ben Simpfendorfer, an economist at Royal Bank of Scotland.

However, that does not mean the government can be too relaxed about the market, because the slump has left many unhappy investors. And given Beijing's huge influence over the market – the state owns 70 per cent of listed shares – they are in no doubt about who is to blame. 中国华尔街博客空间Chkf'gA

“The risk of social instability due to the market crash is running high, especially at a time when inflation is biting purchasing power,” says Steven Sun, China market strategist at HSBC.

Z G/V{$R8G0In India, meanwhile, the economic fall-out appears to be stronger and the gloom in the stockmarket has helped to damp sentiment in the consumer goods and property markets. 中国华尔街博客空间)a S?!v]Et

At the Bombay Stock Exchange on Dalal Street, the mood is sullen among the crowd of retail investors who typically stand outside watching a huge price screen while eating from hawkers' carts under the shade of some trees. 中国华尔街博客空间a_q4@3C[b

“Most people had very high hopes that market returns would never come down,” said Prakash Achariya, a retail investor. Pulling out a hand-written sheet charting his share portfolio, he shows how it has shrunk in value by about 23 per cent to about Rs135,000 ($3,385).

-GtVOQ!C We0Yet in India also, equity ownership is too narrow to create a substantial economic effect. “In the US, there is [a] problem but no panic. In India there's a panic but less of a problem,” says Nilesh Shah, deputy managing director of ICICI Prudential Asset Management, India's second biggest fund manager.

The Bombay Stock Exchange's benchmark stock index, the Sensex 30, is down about 25 per cent from its peak in early January of almost 21,000 points but it remains 19 per cent higher than a year earlier.

Most longer term retail investors know the stock market has given them a fabulous ride over the past few years, rising almost 2.5 times since December 2004. Retail investors hold a relatively modest amount of market capitalisation, about 11 per cent, and only a small number of these are suffering serious losses.

In addition, Indians put only a fraction of their savings into equities, so the ripple effects on the wider economy of the present falls in the stock market are unlikely to create systemic problems in the financial system