Viewpoint: It's the Chinese economy and not the Chinese market that should worry us

KENNESAW, Ga. (Aug 6, 2015) —  

After a period of torrential growth, the relatively fledging stock market in China has recently plummeted by over 30 percent from its peak in June 2015.The Shanghai Composite Index, which reached a peak of 5166 on June 12 slid to a low of 3622 by Aug. 3.

What happened?

Since 2013, forecasts of the Chinese economy have been pointing to a slowdown of an economy to less than 7 percent. In accordance with this real change, a large outflow of funds of around $450 billion began to occur over the last four quarters since June 2014. Keen to raise Shanghai’s status as a financial center for the world and promote greater participation in the windfalls, the Chinese government began to encourage margin trading. The result was a surge in retail margin trading from 400 billion Yuan in June 2014 to 2.2 trillion Yuan by June 2015 (according to Vox) and the “unreal” stock prices then soared by 150 percent. Even well-intentioned, misguided actions can have disastrous consequences, and the next day the correction began to align the “unreal” to the real economy.

There are many reasons for us not to worry about the gyrations of the Chinese stock market. First, when the U.S. financial markets catch a cold, the world sneezes, but China’s financial market is far from being anywhere as global or as impactful. Second, the Federal Reserve was not concerned last week, and when the Federal Reserve Bank of Atlanta president indicates that a September rate hike was still quite feasible, I stop being worried about China. The world is right now only focused on the interest rate moves of the U.S. Fed.
And last, but not least, the Chinese government plays a far bigger role in its financial markets than the U.S. government has ever done, thereby making it the “unreal” market. Government-owned or controlled banks and companies are big offerings in the market. The Chinese government took immediate action to stop the slide, including measures to halt initial public offerings (IPOs) and short selling while encouraging its banks to do everything in their power to stem the tide with little success. It has the financial resources and tools to rectify its mistaken active encouragement of the masses to borrow and gamble. While it takes time to convince the market that the Chinese government will do everything in its power, it has begun to show signs of stabilizing. How they do it will give us an unprecedented inside look into how a government picks up and dusts itself off after a failed attempt to influence markets.

The Chinese economy is slowing noticeably and bringing commodities markets down with it. What I am still worried about is any unexpected and dramatic slowdown of the Chinese economy and not the aligning of an “unreal” stock market with the real economy.