After two years of extraordinary run-ups, China’s two big stock indices, the Hang Seng and Shanghai Composite have gone negative. The implications for the huge country could be more than just falling share prices.
Over the last three months, the Shanghai Composite is down about 13%. That is slightly more than the S&P. The Hang Seng is off 15%. Over the last two years, the Shanghai Composite is up over 300%.
Much of the new-found wealth of China’s middle class comes from investments in the stock market and real estate. A sharp drop in the value of these assets could cause a significant fall in consumer spending inside the country.
The falling Chinese markets are almost certainly a reaction to concerns about a recession in the US and the effects that will have on China exports. This drives of vicious circle of a bad US economy hitting the Chinese stock market which hurts the consumer in that China. Net, net, the China loses more than the US which does not need imports to get out of a recession.
It is a circle which will be very hard to break.
Douglas A. McIntyre
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