How China lost UK GDP in 22 working days

Fergus Cumming.

It’s easy to get lost in the extraordinarily large numbers used to describe complex, modern economies.  Economic analysis is strewn with the words millions, billions and trillions, which sound deceptively similar and are all too easy to jumble up in a slip of the tongue or a slip of the pen.  But size matters.  In the 12 months from June 2014, the value of the Chinese stock market increased by more than the annual output of Japan, but over the next month fell by an amount equal to UK GDP.

Between June 2014 and June 2015 the Chinese stock market created a vast amount of wealth.  The £3.6 trillion created was a quarter more than the annual economic output of Japan in 2014 and the increase in valuation in 2015 alone was equivalent to the GDP of Germany.  But those are flows.  It might be more intuitive to compare those numbers to stocks of assets, apples for apples – (Chinese-manufactured) iPhones for iPhones.  The market capitalisation of the Tokyo Stock Exchange is about 100% of Japanese GDP, so the Chinese equity market increased by more in one year than the entire value of the world’s fourth largest stock exchange.

Figure 1

Source:  Bloomberg.

In the summer of 2015, the Chinese stock market lost a (slightly less) vast amount of wealth.  The £1.7 trillion wiped off the Shanghai and Shenzhen Composite indexes in the initial 22-day collapse is equivalent to the total value of goods and services produced in the United Kingdom in 2013.  Again, comparing like-for-like, that is more than the total outstanding stock of lending to UK households; more than a third of the value of all gold that has ever been mined; and more than double the value of Euro notes and coins in circulation.  Finally, the Chinese stock market managed to write off seven and a half times the nominal value of outstanding Greek government debt in the space of a month.  At the end of August, the Chinese equity markets lost another £1 trillion and in the process gave back the rest of 2015’s gains.

Figure 2

Sources:  Bloomberg, ECB, Bank of England.

Such turbulence may end up having a limited impact on Chinese GDP because consumption makes up a smaller fraction of GDP than in the UK, and fewer Chinese households own equities, directly or indirectly (only around a third of the market is available to trade).  When the Chinese stock markets lost over £1 trillion pounds in 2008, annual GDP growth still exceeded 7%.  But even if the macroeconomic implications this time turn out to be limited, it’s useful to remember the sums of money involved in these swings.  However you choose to represent it, be it in English, using the decimal system or even using Knuth’s up-arrow notation, the answer is “a lot”.

Fergus Cumming works in the Bank’s Monetary Assessment and Strategy Division.

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Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.


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