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China market panic is overblown, experts say (+video)

The turmoil gripping China's equity market doesn't reflect the broader condition of the world's second largest economy, some experts say, even as Shanghai stocks resumed their downward spiral on Tuesday

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A man walks past in front of graphs showing recent Japan's Nikkei share average outside a brokerage in Tokyo August 25, 2015. Volatile global markets showed tentative signs of a respite from the recent plunge on Tuesday as bargain hunters helped Asian stocks off three-year lows, though share markets in China, epicenter of the rout, suffered another big sell-off.

Issei Kato/Reuters/File

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The turmoil gripping China's equity market doesn't reflect the broader condition of the world's second largest economy, some economists and analysts said, as Shanghai stocks resumed their downward spiral on Tuesday.

"The collapse of the equity bubble tells us next to nothing about the state of China's economy," Mark Williams, chief Asia economist at Capital Economics, wrote in a Tuesday note titled 'Panic about China is overblown'.

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"In fact, recent data have been more positive than the headlines might suggest, with large parts of the economy still looking strong. Policymakers in China also have the luxury of still being able to loosen policy if necessary," he said.

The benchmark Shanghai Composite index nose-dived 6.4 percent at the start of trade, following a jaw-dropping 8.5 percent plunge on Monday, the biggest one-day percentage loss since 2007. The market, which had climbed almost 60 percent between January and mid-June, has now erased gains for 2015, down over 6 percent year-to-date.

"The surge in prices that started a year ago was speculative, rather than driven by any improvement in fundamentals. A combination of poor data and policy inaction in China may have triggered today's market falls but the bigger picture is that we are witnessing the inevitable implosion of an equity market bubble," Williams said.

"Similarly, falling equity prices in China shouldn't be a cause of trouble in the wider economy or abroad," he added.

Recent economic data from China have been mixed rather than unrelentingly negative as many recent headlines suggest, Williams said.

While the latest selloff was largely triggered by the disappointing flash Caixin manufacturing purchasing managers' index (PMI) reading for August, he said the data point should be viewed with caution.

"For one thing, the manufacturing PMI has become a less useful guide to conditions in the industrial sector over the past year or so. For another, other parts of the economy appear to be doing much better," he said, citing the Caixin China services PMI, which hit an 11-month high in July.

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"To some extent, the recent pattern of weakness in property construction and heavy industry set against strength in services is a positive sign that rebalancing towards a more sustainable growth model is underway," he said.

Furthermore, with plenty of tools at their disposal, Chinese authorities still have room to loosen policy substantially further, providing a backstop for growth, says Williams.

"The upshot is that we see growth picking up soon. That probably won't translate into a turnaround in China's equity markets but, given the lack of a link between the markets and the economy and the lack of global exposure to China's markets, it's not clear why that should matter to most investors," he said.

Williams wasn't the only economist highlighting the disconnect between China's capital markets and its broader economy.

"[Monday's] scare is a trading event, not an economic event," said Leland R. Miller, president of the China Beige Book International, which releases a quarterly survey sector of the economy based on the methodology adapted from the U.S. Federal Reserve's Beige Book.

"As China Beige Book (CBB) data have shown all year, the stock market has not been tied to the performance of the real economy," he said. "Last quarter, CBB showed clearly its Q2 uptick was not due to stocks. In Q1, the markets saw a huge rally while the economy slowed."

During the April-June quarter, the China Beige Book detected a pickup in the economy that it attributed to a resurgence in the retail and real estate sectors as opposed to the wealth effect from the stock market boom.

The limited boost gained from the stocks boom could possibly be explained by the fact that just one in thirty people in China own equities, according to Capital Economics data.


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