The Shanghai Composite lost 5.2% overnight, some say in reaction to a potential tightening of lending. Others say it a fear that there will be a sovereign debt crisis is Ireland which may cause the euro to drop.
The explanations do not matter to because the sell off does not mean much in the context of the rapid rise of the Chinese market. It is higher by 25% in the last 4 months as measured by the Shanghai Composite. In comparison, the DJIA is up only half that over the same period.
China’s market rise is due primarily to a rapid increase in its PMI, GDP, and trade balance. The China $585 billion stimulation package, put in place at the same time the US fashioned a $787 billion plan, has worked. Either that, or the Chinese economy would have sailed through the recession anyway due to consumer spending in the People’s Republic and an ongoing if muted demand for its inexpensive exports.
The drop in the Shanghai composite shows that China now has to deal with inflation, a demand by many factory workers for higher wages, and a potential currency or trade war with the US. America may seem to be a lion with its teeth pulled out, but it is still the biggest trade partner of the People’s Republic.
As is often true, the expectations that drove China’s market higher were premature. China has the problem America once had. It is the envy of the world. And, as the most envied, it has the longest distance to fall.
Douglas A. McIntyre
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