China stocks surged in the last 30 minutes of trading today. Anyone care to guess who the buyer was? The Chinese government has justified its massive spending of tens of billions of dollars to prop up the collapsing market by citing the specter of “systemic risk” — the phrase use to justify extraordinary government actions during the financial crisis of 2007-2008. But as Fortune’s Scott Cendrowski pointed out yesterday, there’s little reason for China to fear systemic financial failure resulting from the crash. That’s because stock financing remains a relatively small portion of Chinese companies’ balance sheets. And China’s 90 million stock traders remain a relatively small portion of the overall population, making the effect on household balance sheets limited as well.
So why the dramatic language? It has more to do with political risk than financial. As mentioned here previously, Xi Jinping mistakenly took the soaring market as confirmation of the correctness his policies, and now has to deal with a public that is reading a slumping market as the opposite.
The market’s drop will contribute to the overall slowdown in Chinese economic growth. Driven by a soaring market, the financial sector was an outsized contributor to China’s economic growth in the second quarter. That won’t be repeated in the third. So unless someone fiddles with the numbers, the official growth rate will likely drop well below the government’s 7% target. And many analysts believe the real growth rate is actually a couple of percentage points below that.
China’s problems, however, aren’t likely to prevent the Federal Reserve from finally beginning to raise interest rates in September. Expect to hear more today at 2 p.m. today.
| Alan Murray | |
| @alansmurray | |
| alan.murray@fortune.com |
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