China’s Wild Ride

In case you missed it, the Shanghai SE Composite (a capitalization-weighted index that tracks the daily performance of all A and B shares listed on the Shanghai Stock Exchange) entered a bear market in two weeks! From 8/4/09 to 8/19/09, the index fell almost 21% which is the classic measure of a bear market. It has certainly been one wild ride in the Chinese markets over the last few years as the index rose 500% from June 2005 to October 2007 and fell 73% from October 2007 to October 2008, but volatility has dramatically increased in just the last year.

We have to monitor the situation in China closely because this is a very big part of the bullish argument. The Chinese government has deployed a massive stimulus package that is 2.5 times that of the US when compared to the gross domestic product of each country. This has revitalized mining industries, global shipping barometers, and the global appetite for risk as the country has become drunk on easy credit. As a result, China met their GDP growth rate of 7.9% year over year, and the stock market exploded off the bottom in October with a 108% gain. The chart below shows the Shanghai SE Index since October 2007.

So we are left with the question of how to view this latest down move. The bears would argue that the 108% gain from the bottom was a small bull market rally in the overall context of a bear market started October 2007. The bulls would argue the latest sell off was a normal, albeit sharp, pullback during a strong bull run. Additionally, many argue that this could be a foreshadowing of what could occur in the US markets as China led us out of the bear but will lead us right back into it. (Read – decoupling is a myth!) Whatever your answer may be to this question, it is clear that China is an important part of the global market place and we will monitor their situation closely.