Despite Janet Yellen’s efforts to explain [9] to poor people how important it is to build up one’s financial assets, the trickle down “wealth effect” that Ben Bernanke promised would accompany successive rounds of QE never quite panned out as economic growth — which, in the US, is driven by consumption — has now flatlined and even the NY Fed admits [10] that perhaps weather isn’t to blame after all.
Indeed, despite the loud protestations [11] of Blogger Ben, not only has QE failed to boost aggregate demand, it has in fact served to accelerate the death [12] of the American Middle Class by inflating the value of the assets most likely to be concentrated in the hands of the rich. Similarly, record highs on the Nikkei haven’t led to a sustainable upturn in Japanese consumption, as evidenced by April’s abysmal household spending print [13].
But what about China, where record margin debt and a flood of newly-minted day traders have conspired to drive valuations into the “stratosphere” in a rally so impressive that many mainstream media outlets, constrained as they are by political correctness, have run out of adjectives to describe it?
Surely the “world-beating” Chinese rally (last week’s sell-off notwithstanding) and the paper profits it’s generated have had a decisively positive effect on the spending habits of the millions of housewives and banana vendors who have pyramided borrowed money into small fortunes.
Or maybe not.
Recall what we said last September [14] about the breakdown of household wealth in China versus the US:
In the US it is all about (record) financial assets. So much so, in fact, that financial assets as a percentage of total household assets have never been higher at 70.3%, which also means that real estate as a percentage of total is as low as it has ever been. Meanwhile, in China the largest household asset is Real Estate, which at 74.7% of total household assets, is by far the most valuable asset that China's population has.
[15]
Given the above, we weren't surprised to learn that despite Beijing's best efforts to replace a real estate bubble with a stock market bubble and thereby help the Chinese economy along on what is proving to be a difficult transition from a smokestack economy to a consumption-led model, the "wealth effect" is just as elusive in China as it is in the US. WSJ has more [16]:
Even after a slump last week, China’s benchmark stock index has more than doubled in the past year, but there is no sign that investors are splurging with their profits to help the sagging economy.
In developed markets like the U.S., rising stock markets sometimes boost consumer spending and help spur growth. But in China, that effect appears to be nonexistent. The Shanghai Composite Index has jumped 122% in the past 12 months, but retail sales increased just 10% year on year in May and April, the slowest rate of growth in five years.
The reason? At the most, one in 15 Chinese trade stocks, compared with more than half of Americans. That means that much of the gains in equities are made by wealthier Chinese, who have money to put into the markets but are more likely to save profits than spend them. And those who do own stocks appear to be deferring spending, so they can invest more in the markets, especially since recent history shows that rallies can be short-lived.
While the rally has done little to help consumption, it could hurt spending in the event of a market collapse. That is because much of the recent buying has been with borrowed money. Margin debt as a percentage of China’s stock-market capitalization is now higher than on the New York Stock Exchange. If the market’s downturn continues, investors may have to rein in spending to repay loans.
China has 89 million investors with brokerage accounts for a population of 1.3 billion, according to the China Securities Depository and Clearing Corp., implying about 7% of the people are set up to trade stocks. Just 55% of the accounts held stocks on June 12. China’s mutual-fund industry still is small and people’s mandatory retirement savings are managed by the government, which invests the bulk in fixed-income products.
In China, investors have typically preferred real estate over equities, but a runup in apartment prices, followed by a recent cooling, has failed to significantly affect spending.
And while the fact that the percentage of the population that actively trades stocks is smaller in China than it is in the US helps to explain why the majority of household wealth is concentrated outside of financial assets and thus why the wealth effect from rising stocks has not taken hold in China, the punchline here is that the very rally which one might have expected to boost consumer spending is in fact holding consumption back because more Chinese are dumping their money in the market:
Instead of buying a new vehicle, “some people have decided to lease a car for the first time so they can keep investing,” said Shaun Rein, managing director for China Market Research, a consumer-intelligence firm.
Xiaolin Zhang, a housewife in Shanghai, usually spends a third of her household budget buying clothing and cosmetics from Taobao.com, China’s largest e-commerce portal by sales. Now she spends more time watching stock movements than browsing websites. “Trading stocks can be more fun than surfing for bargains on Taobao,” Ms. Zhang said.
Needless to say, when the margin calls start, the Xiaolin Zhangs of the world are going to wish they had bought discount lipstick instead of paying 130 times earnings day trading the Shenzhen, but in any event, after analyzing the situation WSJ discovered that in the final analysis, the only thing that's guaranteed to trigger the "wealth effect" is ... well, wealth:
The biggest influence on consumption—in both China and the U.S.—appears to be inflation-adjusted wages. In China, real wage growth has been slowing over the past two years, to 6.4% in 2014 from 9.8% in 2012.
