China stock crash will hit economy: Credit Suisse

Published Wed, Jul 29 20152:28 PM EDTUpdated Wed, Jul 29 20152:56 PM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

A major investment firm has knocked down the theory that China's parabolic bear market won't affect the country's economy. ( Tweet This ) U.S. investors are counting on this decoupling in order to justify buying stocks like Apple despite the China market swoon. The plunge in mainland Chinese stocks hurts the country's strong financial sector and consequently does weigh on economic growth, Credit Suisse said in a note Wednesday. Analyst Vincent Chan said in the report: "Based on our understanding, the strong growth of the financial sector is largely due to the vibrant stock market, with turnover up 542 percent year over year during this period. Even if the market can stabilize after the crash, the turnover growth will likely slow down sharply, and from a high base, the financial sector GDP growth momentum could reduce significantly, particularly from the fourth quarter of 2015 onward." He noted that the 7 percent GDP growth in the first half of this year was driven largely by expansion in the financial sector, which surged 17.4 percent year over year. If that was normalized to 10.4 percent, China's GDP growth would fall to 6.4 percent, the report said. Read More China's market is un-chartable: Technician Softness in the financial sector could hit the nascent recovery in tier one property sales, Chan said. In a spiral effect, weakness in real estate development would add further downside to the already struggling industrial and construction sectors. Declines in those areas have contributed to the commodity bear market and slower growth in the transportation sector, the report noted. "Revival of industrial sector growth is a must for any improvement in China's GDP growth," Chan said. The financial sector and overall economy also face pressure from slower credit growth, which is still roughly double the rate of GDP expansion. Goldman Sachs analysts noted on July 20 that the rising ratio of debt to GDP "together with an accumulation of property inventory following China's response to the global financial crisis, and the recent appreciation of the RMB against its trading partners, has resulted in a major slowing in commodity-intensive (fixed asset investment) in property and manufacturing." The roughly 30 percent drop in mainland Chinese A-shares from their June high has many U.S. analysts anxious about the impact to the world's second-largest economy. Most recently, Bridgewater Associates' Ray Dalio highlighted concern over the fact that the rapid burst of the A-share bubble historically affects the economy. "In cases in which there were both debt bubbles and stock market bubbles that burst, the subsequent growth rate was on average 1.8 percent per year lower over the subsequent three years relative to what growth would have been without these events," Dalio said in a July 23 note to clients . Read More July slaughter sends commodities to 13-year low To be sure, some analysts remain optimistic about China's growth as the nation shifts to a consumer-focused economy from a manufacturing power. In 2013, the service sector's contribution to GDP growth surpassed that of the manufacturing sector. In the long term, even Chan expects positive contribution from the development of e-commerce.

An investor watches the electronic board at a stock exchange hall in Fuyang, China.

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A major investment firm has knocked down the theory that China's parabolic bear market won't affect the country's economy. (Tweet This)

U.S. investors are counting on this decoupling in order to justify buying stocks like Apple despite the China market swoon.

The plunge in mainland Chinese stocks hurts the country's strong financial sector and consequently does weigh on economic growth, Credit Suisse said in a note Wednesday.