Notion that Stock Market Can Boost Economy Is Misguided

China's stock market is on a roll, giving rise to a view that it could help revive the slowing economy. The two have an interesting relationship, and there are advantages and disadvantage to using the market to boost growth. Yet, in the current circumstances, the stock market will be hard pressed to perform that role.

The Shanghai Composite Index has doubled since the second half of 2014, and turnover keeps surging. However, the economy faces growing downward pressures. GDP growth in the first quarter slowed to a six-year low of 7 percent; the stock market has been faring too well, compared with economic performance. Some say the bull run shows investor confidence in reforms because they are putting their money in stocks. Last year, we said the stock market should be a "reform-created bull," but that doesn't mean it will be. Given the reform challenges, it is hard to buy into the view that the charge has been due to rising expectations of reform.