Wednesday, May 30, 2007

Chinese Market Plunges - barely causes a ripple outside of China

The recent correction of the Chinese markets today barely caused a ripple in stock markets outside of China. The main Shanghai Composite Index tumbled 6.5 percent to 4,071.27 Wednesday. The Shenzhen Composite Index for China's smaller second market fell even more, closing down 7.2 percent at 1,199.45. Most of the other world indexes closed up by more then 0.7% on average in response; largely ignoring the Chinese market plunge. This is another sign that the stock market bubble in China is irrelevant to the rest of the world. The stock market in China represents only a small fraction of the overall worldwide markets and the overall capitalization is minuscule on a comparative basis.

From a big picture perspective, the combined capitalization of the Chinese stock markets was US$786b at the end of 2006. The total for all the global equity markets is over $33Trillion; the NYSE alone is at over $23T (Sept 2006). The US represents over 1/2 of the global equity markets capitalization.

The Chinese government holds over $1.2T foreign reserves, and are increasing these reserves at over $12B per month. The Chinese product exports (not overall trade) are now at over $1.2T per year. While the Chinese national gross GDP was at about $2.6T; compared to the US at about $13.2T (notice that the US stock market capitalization is 2x bigger then the national GDP).

The size of the Chinese stock market is a small percentage (2.3% at best) of the overall world-wide equity markets (ignoring the size of the futures, commodities, options, bond, debt, and other markets), and just a fraction of the Chinese foreign reserves or export trade size. The overall stock market capitalization places the country in a distant sixth place slot for overall national equity market size. The stock market capitalization in China represents a mere 60% of their GDP.

From the math, the stock market is an insignificant (and non-critical) component of the overall Chinese economy. This minimizes the risk that a meltdown in the Chinese stock market would have any international impact.

From a broader economic perspective, most analysts expect the sizzling economic growth in China to slow a bit because the government is deliberately tapping the brakes. Most do not expect the slowdown to be very significant despite these efforts. There is still a huge demand in China for building materials, energy, raw materials, etc.... and the economy is still growing at greater then 9% per year. The economy in China remains strong.

The stock market situation in China however is another story. The local equity markets are in a speculative bubble that is doomed to burst; the question is when rather then if. The good news is that the size and capitalization of these stock markets are insignificant from a global perspective. The bad news is that the bubble pop will take a lot of unknowledgeable individual investors located in China down with it.

One recent article also looked at the Chinese market situation:
Greenspan's China-Stock `Contraction' May Not Spread

Some quotes:

"That's the conclusion of a number of international economists and former government officials around the globe. They say China's economy shows little correlation with its stock market, foreigners are mostly excluded from owning shares and Chinese participation is limited to less than 10 percent of the population, reducing the effect of a bursting bubble."

``This is a relatively small casino,'' said Edwin Truman, a former director of the Federal Reserve's international finance division and now a senior fellow at the Peterson Institute for International Economics in Washington. ``Even the implications for the Chinese economy should be minor.''

"Total stock holdings in China account for just 25 percent of domestic wealth, and in Asia only Indonesia has a smaller market capitalization than China's 60 percent of GDP."

So in summary, the Chinese stock market melting down (which is likely to happen) is a non-issue from an international perspective; the Chinese economy having issues would be another story.