Credit Suisse Remains Cautious in China

Credit Suisse’s brief notes show that the firm has been consistently bearish on the Chinese economy over the past few years, and it would remind investors that nominal GDP growth there is just 5.8%.

As far as what to expect ahead, Garthwaite said:

In our view, China is in the midst of a triple bubble, with the third biggest credit bubble of all time, the largest investment bubble (proxied by the investment share of GDP) and the second biggest real estate bubble. This is occurring against a backdrop of near record producer price deflation, near record low growth in bank deposits (the main source of internal liquidity), FX outflows (the main source of external liquidity) and falling house prices (with property accounting for the majority of household wealth).

As far as the impact of the fall in the stock market, Credit Suisse doubts that the sell-off in Chinese equities is that significant in itself. It gives the following reasons:

• The stock market is back to where it was in late March;
• The savings ratio in China is anyway close to 50%, and equities represent only 9.4% of household wealth (compared to nearly 30% of household wealth in the US);
• Free float is small at just under 40% of market cap;
• Stock market capitalization (combining Shanghai and Shenzhen A-shares) to GDP even at peak was not dramatic by international standard (at 112% of GDP compared to 127% in the US). If we adjust for free float, this is even smaller (at most, 45% of GDP);
• After the 1987 crash, the US savings ratio did not rise (and in China there is a smaller proportion of the wealth in the equity market than in the US in 1987). For details refer to our full report.

ALSO READ: Will Shanghai Crash Like Nasdaq in 2000 and 2001?

As far an independent take, here is a chart that shows Shanghai today and before the Great Recession, with comparisons to the tech bubble, when the Nasdaq inflated from under 2,000 to over 5,000, only to fall all the way back down. As a reminder, it took until 2015 for the Nasdaq to get back to where it was 15 years earlier.