(Bloomberg) -- China's brutal stock market selloff risks exacerbating a downward spiral of pessimistic sentiment that will in turn weigh on economic growth, according to Goldman Sachs Group Inc. chief China economist Hui Shan.
“It is quite frustrating to see the market underperforming and outright decline,” she said in an interview on Bloomberg TV on Tuesday. “What we do worry about is the sentiment and confidence impact reinforcing the market going down, reinforcing the bearish sentiment.”
The nation's benchmark CSI 300 Index fell to a five-year low this week, capping a rout that has seen more than $6 trillion wiped out from the market value of Chinese and Hong Kong stocks since a 2021 peak. Premier Li Qiang this week called for more “forceful” actions to stabilize markets and investor confidence — after which Bloomberg News reported authorities are mulling a rescue package backed by about 2 trillion yuan ($279 billion), mainly in offshore funds.
While Shan sees the sentiment challenge as a major one affecting growth, she added that the stock rout won't necessarily have a direct impact on consumption in China as it does in other economies. She cited a well-known economic theory called the “wealth effect,” in which people become less willing to spend because they feel poorer, rather than their income actually changing.
“In China, we have found the wealth effect is not that big,” Shan said. “The main effect on consumption is income. People need to have income to consume.”
While China's economy was able to achieve its economic growth goal of around 5% last year, she warned that repeating that target would be “very hard” in 2024. Goldman estimates that about two percentage points from last year's recorded 5.2% growth rate were thanks to a one-off boost from the nation's post-pandemic reopening. It forecasts an expansion of 4.8% this year.
“Policymakers really have a lot work to do to get even close to 5% this year,” Shan said.
She sees fiscal policy as more important than monetary policy this year, since the former can increase demand. While cutting interest rates and injecting liquidity into the financial system are helpful, Shan said, they aren't essential to growth.
Geopolitics have also featured into conversations with clients, she said, citing the prospect of former US President Donald Trump's re-election as a key topic. Shan cautioned that learning what China's role would be in another Trump presidency would be “quite messy and complicated,” citing his proposed 10% tax on all US imports.
--With assistance from Yvonne Man.
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