Concerns that China's financial rout is punishing its middle class
Despite the People's Bank of China's move to cut interest rates and reduce the reserve ratio requirement of banks, concerns are still mounting that the country appears powerless to prevent a massive slowdown in Chinese growth and that it is punishing China's middle class the most, who had been encouraged to pour their savings into real estate and shares.  Analysts are predicting that many middle class households will now cut back on their spending, which will in turn act as a drag on the country's slowing economy.
As a result, a large proportion of the country's 90 million or so retail investors are likely to be either close to break-even or nursing losses on their investments.

Disastrous market foray

Singed by their disastrous sharemarket foray, many middle-class households are likely to cut back on their spending, which will act as a further drag on the country's slowing economy.

At the same time Chinese banks, which are likely to suffer losses on the loans they made to retail investors, are likely to become even more risk-averse, and to cut back on their lending to businesses.

A cutback on bank lending will be a further blow for Chinese companies, particularly because the collapse in the Chinese sharemarket – and the collapse in Chinese investor confidence – will make it much more difficult for listed companies to raise funding from their shareholders.

But the collapse in the Chinese sharemarket has also undermined confidence in Beijing's capacity to rekindle economic growth in China, the world's second-largest economy, which accounts for about 15 per cent of world gross domestic product.

Advertisement

Investors unnerved by yuan devaluation

After the Chinese sharemarket began to wobble in mid-June, Beijing tried initially to maintain a floor under share prices, before deciding finally that this policy was too costly.

Investors have also been unnerved by Beijing's decision to devalue the yuan on August 11. Although the People's Bank of China tried to depict this decision as a policy move aimed at allowing the markets to play a bigger role in setting the currency's value, the irony is that the Chinese central bank has been intervening heavily to support the currency.

Many analysts believe that Beijing's somewhat erratic decision-making shows that the Chinese economy is becoming far more difficult to control.

Investment, which in the past has accounted for as much as 60 per cent of China's GDP, is falling as the combination of a steep rise in salaries and a drop in industrial profit have squeezed corporate profit.

Foreigners are no longer investing in China, and many Chinese businesses are relocating offshore, which is leading to heavy outflows of capital. There's little reason to believe that the Chinese central bank's latest monetary stimulus will do much to reignite investment spending.

Advertisement

In the past, Beijing was always able to rely on higher construction spending, which produced multiplier effects throughout the economy, to boost growth. But developers' enthusiasm for undertaking fresh real estate projects has diminished in the face of widespread housing oversupply and vacancy levels that in some areas are hitting 20 per cent.

China is also coming up against borrowing constraints. The country's debt already stands at about 280 per cent of GDP, which means that Beijing can no longer rely on using dollops of debt to drive growth.

What's more, local authorities, unnerved by anti-corruption campaigns, are reluctant to load themselves with fresh borrowing to finance big new projects. Such projects represent a significant career risk, particularly when there is clear evidence of over-capacity in many areas.

As investors continue to question Beijing's efforts to reignite its slumping economy, global financial markets are likely to remain extremely volatile.