When the Shanghai and Shenzhen stock exchanges opened for business in December 1990, there were eight listed stocks with a combined market capitalization of USD 500m. By 2015, the two bourses had 2,800 listed companies with a total market cap of over USD 10 trillion. Once purely a socialist command economy, China, the Middle Kingdom, is now partially socialist and partially capitalist. China represents 15% of world GDP and outweighs every country in the world except the United States. Therefore, what happens in China matters. Yet, it’s worth remembering – Chinese equity markets are not the Chinese economy. Unlike in the Western world, where listed companies represent a large proportion of GDP, the free-float value of the Chinese markets is only about one third of GDP, compared with more than 100% in the US and the UK. Besides, less than 15% of Chinese household financial assets are invested in the stock market. US interest rates remaining at zero, at the margin, are now a net negative for the economy. The sooner we get the first rate hike this cycle, the sooner it would remove the uncertainty that a 25bp rise in short rates would spell doom for financial markets. I can’t help but think that the real problem in the stock market is not now. It is for later, when inflation fears abound and the Fed starts hiking aggressively.
Subscribe to our mailing list and receive our Market Viewpoints directly to your inbox
© 2019 Crossbridge Capital