Fitch, Moody’s say China stock drop won’t affect economy

Two major global ratings firms said Thursday that the China stock market’s recent volatility doesn’t pose a systemic risk to either the economy or financial systems.

Fitch and Moody’s Investors Service, both based in the US, said because Chinese banks have little direct exposure to equities, there is no reason for them to change their forecasts on the Chinese economy.

In June, the Shanghai Stock Exchange Composite Index tumbled 30% off its June 12 high. Still, on Wednesday, China’s National Bureau of Statistics that the country’s gross domestic product grew 7% in the second quarter.

In a report released Thursday, Fitch said the second-quarter GDP growth supported its view that the equity market’s turmoil will have little effect on the real economy.

With direct investment in equities making up less than 1% of bank assets at the end of 2014, the report said this small allocation would have little affect on the banks’ investment portfolios.

“Fitch does not expect the equity market correction to have a major impact on Chinese banks’ balance sheets or pose a systemic risk to the banking sector. Banks are not allowed to lend directly to customers for margin lending,” the report said.

Moody’s agreed in its own report Thursday.

It said the stock market’s volatility wouldn’t affect its forecast that China’s real economic growth will come in between 6.5% and 7.5% this year and 6% to 7% in 2016.

“The direct impact from heightened volatility in China’s equity market on financial sector output growth will be limited, while the indirect effects of market uncertainty on consumer spending, employment and corporate investments will be similarly muted,” Michael Taylor, a Moody’s managing director and chief credit officer for Asia Pacific, told Xinhua.

Commercial banks’ direct exposure to the domestic equity market is low, and the stock market rout will not have a significant impact on credit quality, the agency said.

The Shanghai Composite Index rose 0.49% Thursday, while Hong Kong’s Hang Seng Index rose 0.43% following Wednesday’s selloff.

Categories: Asia Unhedged, China

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  • Mr. Bernard Wijeyasingha

    The article states “Two major global ratings firms said Thursday that the China stock market’s recent volatility doesn’t pose a systemic risk to either the economy or financial systems.”
    Maybe. If the volatility of China’s stock market does not pose a “systemic” risk to the economy and financial institutes, does it pose other problems?. It may not have a negative bearing on the entire economy and financial systems of China (systemic) but has it effected any part of China’s economy and financial institutes where they do have a bearing on world markets?
    I doubt if anyone came to the conclusion that the swings in China’s stock market would damage the entire Chinese economy and her financial institutes (Systemic). The fear is that China’s economy grew at a rate of 10% and above. It is now “happy” that the economy is growing at 7%. Now this hit on her stock market.
    China also holds massive amounts of US treasury bonds. the US economy has slowed to such a degree that Chinese exports are effected. that can be said of the EU as well.
    The Crisis of ISIS and other Middle Eastern problems, including the drop in global crude prices has negatively effected many of the OPEC nations in the Middle East. That region is also a massive consumer market of China’s exports.
    In a world that has adopted the concept of a “Global village” the problems of a major economy like China effects every nation in this “village”. That is what I would like Moody’s and Finch to clarify.

  • ModernChinese

    NOBODY understands Chinese economy than the Chinese themselves.

    All other Western “evaluation and analysis” of “The coming collapse of China” for the last 66 years have proved beyond doubt that their mumble-jumbles are nothing but the malicious misinformation aimed at the brainwashed Western audience.

    The current volatility of the Chinese stock market is no more than the unrealistic/inexperience/greedy small investors – who don’t understand the nature of stock market – AND the foreign hedge funds manipulating market to pocket undue profits.

    But they are hugely mistaken, just like George Soros did in Hongkong market in 1997, when they don’t realize whom (China) they are up against. It was a disastrous financial loss for Soros then and it is the bitter loss for the foreign hedge funds now when their short selling scheme backfires on them: Chinese stocks are coming back stronger and more sustainable than ever!

    China economy is on the continuous rise because of her rock-solid fundamentals: dynamic and diversified manufacturing industry, strong banks’ balance sheets, huge foreign reserve, expanding global markets, increasing trade relations with all countries, favorable/cheap global energy resources, well-educated labor forces, and last/most important: the strong central Chinese government which is committed to the development and rejuvenation of this magnificent ancient civilization.

    Anyone who is stupid enough to “fight” Chinese rising trend in 21st Century WILL lose: the collapsing European Union and rapidly declining/disintegrating US economy are clear for all to see.

    Let alone the scavengers of the Western bygone colonial era like Japan and Philippines.