Hang Sheng just gone below 20,000

Will China hold up for the coming years?

It is my daily routine to check the indices around the world before bed. And, surprisingly, Heng Sheng just gone below 20,000 today (May, 14th)

Is it just a one-day event?

I recall that earlier in March some of my friends cheered for their ETF trading in Taiwan stock exchange. They invested in a fund that markets as a tracking portfolio on Hong Kong, Shanghai, and Shenzhen indices. I was "a bit" skeptical back then. "A bit" serves double meanings here: On one hand, I think there is a point that Chinese economic model still the one keeps the international economic revolving, and there is nothing wrong for them to advocate more on domestic consumption. On the other, a strong doubts in my mind and cannot be taken away: Do Chinese people really have pocket money in hands to spend (to boost the domestic consumption?)

Before we go into details, I would like to point out two things that are well-noticed: Chinese people love to save: their saving-to-GDP ratio is constantly higher than OECD countries. Yet, China has just gone through a frenzy boom in real estate. They are crazy at buying houses, and the new generation holds nothing back for luxury consumption.

So, although they might have cash, how much they left in hands to spend?

First, I would like to address the saving issue, I remember the working paper I read last year, (Hung and Qian, 2010) The author argue a few factors that led to the result of high saving rate.The four major factors are: Low old dependency ratio, strong economic growth, weak social safety net, and Asian growth model (i.e. private sectors save for the national orchestrated industrialization plan: Then the cheap funds are channeled to "national projects") In my opinion, none of these factors can predict savings to be free up for consumption. Chinese population will grow older eventually, economic growth are clouded by continuous global crisis, social safety net is yet well-built, and the Asian growth model might lead to a new bubble. People, facing so many uncertainty ahead, would more likely to save up even more than less. In that occasion, the current policy can hardly achieved.

Then, the economic growth starts to show signs of turning points. Refereed to the beginning links I attached here, reported by Bloomberg. The export is slowing, the central bankers are taking some easing measures, and they have attempts to bolster their equity markets. These are not good signs of robust economic growth.

Is Hang Sheng getting below 20,000 a one-day issue? I certainly hope so. After all, we certainly need a few robust economies to keep the global growth go on. One engine is never enough, and a few more are always better. Sadly, now we might get one failing after the other.