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No Need to Stalk Chinese Stocks

by | Aug 10, 2015 | Articles

While one might consider a stock market crash in the world’s second largest economy to be a big deal, we can take solace knowing that the intrinsic nature of the Chinese stock market is much different than that of the United States (or other international markets). The Chinese stock market varies because it is marginally tied to the Chinese economic state; this means the market capitalization is much smaller and most stock activity involves the government. Instead of accurately depicting the condition of the economy, the Chinese market volatility reflects the effects driven by investments of Chinese retail investors and these affects are, thankfully, rather insulated. The S&P 500 overall was not largely impacted by these losses. Moreover, even the Hang Seng in Hong Kong, which lists many of the same large, premier companies as the Chinese market, dropped less than 3%. Furthermore, despite the recent decline, the Shanghai composite and Shenzen index are up 68 and 86.6 percent, respectively, over the last year. It appears the proportionality of these losses in relation to their current significance has been placed out of proportion.

So, why the effect on U.S. markets? One action related to the market drop that has created some concern is the Chinese government’s rash and desperate effort to stabilize the markets. Upon falling, the stocks were quickly propped up with a 120 billion dollar fund from the central bank. IPO’s were suspended and the government urged executives to buy company shares. This apparent fear was observed internationally and rippled through the U.S. stock markets for a couple of days. After all of this drama, the Chinese and U.S. economies seem to remain unchanged too.

The real problem in China that we see in the coming months (or years) is the government spending and the subsequent ever-growing housing bubble. With real estate being only viable and consistent investment option for the average Chinese citizen for so many years, buying extra property became extremely popular. Much like in the U.S. prior to 2008, real estate was by far the most risk averse and easiest option for investment. Additionally, the biggest incentive for the Chinese citizens was that they were essentially using the extra money that government stimulus had given them to do so. With real estate expansion and property investment, China is now left with massive cities (capable of housing millions of people) that are empty and yet new construction is still in force. The signs that this growth is purely governmental and has nothing to do with the Chinese economy, means that a bursting bubble is likely in the future. Today is not that future though.

Sources:

http://www.nytimes.com/2015/07/28/business/international/chinese-stocks-plummet-in-shanghai-and-shenzhen.html?_r=0

http://www.cnbc.com/2015/07/28/3-charts-explaining-the-chinese-stock-market.html

 

 

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