The stock market's influence on consumption is obvious. This time, the crisis occurred as the US stock market fell all the way from 14,000 points. The public was waiting until March of this year when the stock market at 6,400 points started to rally for most of the public, and the United States gradually restored consumer confidence.
China has a similar situation. In October 2007, when the stock market fell, consumption also went into a downturn. The government had a problem of how to boost domestic demand. It wasn't until the stock market recovered from the 1,600-point level that consumption followed suit.
Why are the stock market and consumer spending so tightly linked? Just like stocks and cash are forms of wealth, the liquidity of stocks is fast, meaning they can be converted into cash anytime. Knowing this point makes it not difficult to understand the relationship between the two. The impact on consumers is not just about the traditional sense of money supply but also includes endogenous money. For a long time, textbooks have said that when the stock market rises, purchasing power increases equivalently, as if part of the currency is being released endogenously. For stockholders, it is equivalent to an increase in personal wealth, naturally enhancing individual purchasing power.
An increase in personal wealth will stimulate consumption. Therefore, when the US stock market rose to over 14,000 points, the United States had very strong consumer momentum. This is because, in the American wealth composition, the proportion of assets in stocks is larger, making the effect of the stock market on consumption more direct. Being aware of this, the Chinese government, in dealing with the subprime crisis and stimulating economic development, first sought to activate the stock market and extricate it from its difficulties.
In fact, when the Chinese economy was affected by the subprime crisis and in a passive state, despite various good news being publicized, the stock market rarely saw decent adjustments before July 29. Slight adjustments were quickly met with policy interventions, leading the Chinese stock market to experience a wave of strong uptrends.
So, what does the recent decline in the stock market represent? It reflects decision-makers' concerns about inflation.
Of course, the stock market affects consumption, and inflation also has inseparable links, especially in China. Because the stock market forms part of the endogenous purchasing power, once this purchasing power assumes the presumption of consumption, it leads to higher prices and exacerbates inflationary pressures. Precisely because of this point, whenever inflationary pressure arises, the Chinese government regulates the stock market, meaning there is no bull market during inflation. History proves this point.
On one hand, this time, the hidden dangers of inflation and the stock market do not actually differ much but rather depend on the amount of credit capital infusion daily. On the other hand, despite the stock market doubling compared to the 1,600-point level, for most people deeply entrenched, or insufficient for this rebound to help them see clearly. Thirdly, this wave of rising in the stock market absorbs excess liquidity, easing supply and demand, which is conducive to price stability. If there were no rapid absorption action by the stock market, capital would inevitably flow into the commodity market, promoting price increases.
Obviously, compared with past bull markets, this wave of stock market rise has a very weak impact on inflation. The real hidden danger brought about by inflation is the amount of credit, precisely because of this point, the Central Bank started fine-tuning monetary policy in July, significantly reducing loans — mid-year RMB loans increased by 3.559 trillion yuan nationwide, compared to 1.53 trillion yuan in June, showing a downward trend of 77%.
For funds aimed at promoting a type of bull market, tightening loans not only directly reduces the supply of funds in the stock market but more importantly brings expectations or hints — i.e., the continuous rebound of the stock market starts to face blockages. With group thinking or selection, it will definitely affect the stock market trend, along with the desire of many profitable disc prophase realized, thus expressing Varennes behavior appears. A-share experiences a nearly 30% "5·30" plummeting event.
However, it should be noted that for the government, it needs a hard bull market. Firstly, this is a financing need. This round of adjustment began on July 29 this year, the day China Building was listed, raising RMB 500 billion through A-shares, becoming the world's largest IPO transaction of the year. New stock issues are not only large in amount but also very intensive. If the stock market enters a bear market, restarting financing may be forced to terminate, which obviously does not align with the government's interests.
Secondly, if the stock market goes bearish, it inhibits consumption, surely creating a headache-inducing impulse problem for ecosystems, possibly worsening the situation. Macroeconomic data shows that industrial production and investment data in July were significantly lower than previously expected, particularly as organizations realize the role of resuscitation in expanding exports decreases again. Domestic demand is evident. Therefore, the foundation of the real economy is still fragile today, and the stock market trend not only relates to the masses of investors' interests but also bears on the overall situation of economic recovery.
Therefore, at this stage, stock market adjustments or even quick adjustments are normal, but continued slumps are unlikely to bear.