By Yu Zhixiang

The long-awaited Olympic effect for Chinese equity market turns out to be a disillusion. The domestic A-share market has ridden on a bear run since October 2007, with the market capitalization shrinking from last year's RMB 32 trillion to RMB 16 trillion today.

The drastic fall of the stock market has already taken a toll on the real economy such as investment and consumption. While broken money flow throttles the normal operation and technological innovation of companies, deflating wealth in stocks dampens consumer spending and poses a threat to the macroeconomic environment - which places a high hope on consumption-driven demand to lead China's economy out of the current quandary marked by its overdependence on exports.

Anemic listed companies

According to Economic Information Daily, a business paper based in Beijing, 60 percent of listed companies say the increasing difficulty to raise money from the souring stock market is turning them to other financing sources, adding to their already mounting costs. Take Fucheng Wufeng for example. The Hebei province-based listed firm, in a dire need for a large sum of money to maintain its business in the busy season and to repay its bank loans, can not but borrow RMB 30 million from a real estate company, at a rate detrimental to its fitness.

Cash starvation is a widespread problem troubling companies getting floated in Shanghai and Shengzhen bourses, as shown from their mid-year reports. The 250 listed firms have an aggregate capital flow of RMB 11.6 billion so far this year, a 51 percent drop from the same period last year. 92 of them have reported a negative circulation of operational capital. 

The cash-anemic endemic, which has long plagued small and medium enterprises, has spread to large state companies as well this year. Business giants like Sinopec and Financial Street are mulling over the plan to float corporate bonds to ease their financial embarrassment in the capital market. Nevertheless, since not all companies are entitled to do so, the fact is most of them have few options to find money elsewhere.

The deflation of wealth

The Shanghai Composite Index, the major indicator of the Chinese stock market, has fallen under 2500 points as of data last week, witnessing an evaporation of RMB 4 trillion in circulation and RMB16 trillion in market capitalization - which is the equivalent of 56.65 percent of the nation's RMB 24.66 trillion GDP. According to statistics from Xinda Security, the largest loss of the equity market has already gone beyond 60 percent while 90 percent of investors are running in the red these days. Market insiders note that the nose-diving of stocks does no good to state assets either, which would suffer a sharp devaluation when sated-held shares are reassessed based on current market values.

The number of new trading accounts has dropped significantly as the market goes bearish. Empty accounts have made up 60 percent of all currently, an ominous sign for the investment prospect. Economic Information Daily points out that 17 percent of city dwellers, as against 32 percent at the beginning of this year, would like to buy stocks at present, 12 percent as against 26 percent to buy funds, and 22 percent, compared with 29 percent, would like to append more money into the market. 

According to statistics, every 10 percent of fluctuation, either upward or downward, in China's stock market would give rise to RMB 700 billion in or out of circulation and RMB 2 trillion in expansion or shrinkage of market capitalization, a force that cannot be neglected by the real economy, particularly when consumption and investment are concerned.

Austere days ahead

According to a recent survey on Chinese individual investors by Beijing Office of Deutsche Bank, an international investment bank, respondents say they have lost 76 percent of their annual income over the past six months from stock trading.

Deutsche Bank estimates that the market correction would cost 1.7-2.2 percentage point in urban consumption or translate into 0.5 percent decline in GDP growth. The negative wealth effect would put a dent in sectors like tourism, catering, clothing, footwear, goldware, jewelry and cosmetics. Demand is expected to shed by 4-6 percent in these areas. Passenger growth for airlines will be 5-6 percent less than previous projection of 13 percent. Sales figures for department stores are also adjusted down by 3-4 percent from 20 percent earlier. 

An AC Nelson survey suggests that 70 percent of retail investors will cut back on daily expenditure, 75 percent of interviewees say they will spend less on pastime and 68 percent are considering reducing the times to dine out.

Though there is lack of an all-round appraisal of how a sluggish equity market will sap the government's effort to boost domestic consumption and change the growth pattern, experts warn that the negative impact can never be overlooked.