![]() With policymakers struggling to keep a lid on a volatile stock market, it's not a stretch to imagine that they could be in for a whole new level of pain if and when the economy starts to really struggle.Īgain, a lack of faith in the data is part of the problem on both fronts. The volatility in the Shanghai stock exchange and the somewhat panicked and ineffective response could be acting as an indicator of how well-managed (or not) the Chinese economy is as a whole. While the Chinese stock market may not move in line with the S&P 500 historically, the Chinese economy certainly affects American companies. ![]() So what does all of this have to do with the US markets? This is becoming more worrisome due to China's ballooning debt levels, which will further limit the government's ability to maneuver. Chinese policymakers' usual methods for steering the economy also appear to be losing effectiveness. So, even though China is still far from a recession, it's still at risk - and given concerns about how realistic these growth numbers are, it's difficult for investors to gauge just how much risk there is. That worry is justified: by World Bank estimates, a 1 percent decline in China's growth rate causes a 0.5 percent drop in global growth. But when it slows, well, everyone start to worry. When China grows, many would argue, the rest of the world also grows. While its growth rate of 6.9 percent in 2015 is enviable by American or European standards, it's the lowest the country has seen in 25 years. Economic worries pave the way for market concernsĮconomic growth is a big issue for China. Taken in tandem with a faltering Chinese economy, investors can't help but worry. While it's just one (admittedly somewhat extreme) example, Nevsky's closure exemplifies the unintended consequences of Chinese market interference. One of the key reasons? In a letter to investors, the founder said that a lack of transparency in markets like China is making it increasingly difficult to make good investments. ![]() Added to outright market interference, investors begin to lose confidence in the Chinese market as a whole.įor an indication of how bad this can get, prominent hedge fund Nevsky Capital, which returned 6,400 percent in the past two decades, recently closed its doors. There is always concern that data coming out of Chinese economic authorities and companies is not completely transparent. This kind of interference in the market is unheard of in the US, and it throws a wrench into an already-complicated valuation process. Their actions include trading suspensions, stopping initial public offerings, using government agencies to buy up index funds, limiting short sales, and even banning large individual shareholders from selling. Regulators at the Bank of China have undertaken significant measures to get a handle on recent stock market volatility. Part of the reason behind Shanghai's apparent independence is that market in China plays by its own rules. But going back 10 years shows a correlation of 0.37 between the S&P 500 and the Shanghai index. Of course, that could be a fluke based on too little data. For the correlation coefficient, 1.0 describes two markets that move completely in lockstep and zero means that the markets have no influence on each other at all. A study looking at the last two years of returns found that the correlation between the indexes (measured by a number called the correlation coefficient) was just 0.15. You might be surprised to find that, technically speaking, the Shanghai index and S&P 500 have very little in common historically. Why does the Shanghai index matter to the S&P? Mixing up the stock market If you're wondering how it all fits together, you're not alone. ![]() China has taken center stage as regulators attempt to intervene in a market that seems determined to fall, a situation that has investors in American investors just as worried. Between plummeting oil prices, a Shanghai stock market that had to be shut down twice in as many days, and the worst start of a year in history for the S&P 500, it's been - to put it mildly - a bit of a January.
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