Manageable impact on Chinese economy so far

Should the Chinese stock market crash (Shanghai Composite dropping to 2000), this would (all else being equal) knock 1.0pp off Chinese GDP growth over the coming year. Albeit down 25% from the June high, it is worth noting that the index is still up by almost 20% year-to-date. A drop to around 2000 would mark a return to the levels of last summer.

Generally low exposure of household balance sheets to equities: Equities represent around 6% of Chinese household's financial assets. Moreover, only an estimated 6-7% of households own equity investments. When it comes to daily trading volumes, however, retail investors have a strong presence. Balancing these factors, the wealth effects from the recent equity decline are manageable.

Financial sector is the most direct impact on the real economy: Equity gains have delivered a boost to the financial sector and real GDP growth would have been 6.5% yoy in real terms in 15Q1, compared to a realised 7.0%, without this gain. Disappointing, but far from a hard landing.15Q2 GDP (due out this week) is expected to clock in at 6.8%.

Non-financial sector exposure may weigh on debt sustainability: Equity investments may explain the recent doubling of the share of non-operating profits to 10%, but finds no major impact on real economic activity. however, that falling non-operating profits may impact debt sustainability.

Mixed impact on financial stability: The mainstay of China's financial system, should have little direct exposure to the equity market. Even if they prove to be involved indirectly via consumer or corporate lending, the potential size of the problem caused by the equity market will be manageable.