China - Does It Really Matter?
February 28th, 2007
The market has risen dramatically without looking back, ignoring every 
possible piece of negative domestic news (e.g. lower home sales, bankruptcies of subprime lenders). The reaction to the possibility of slowdown in the Chinese economy was an excuse for a correction. This correction has caught many with their pants down, due to the euphoria of the cyclical bull market. Most portfolios have been assembled for ‘return’, while paying little attention to risk.
Let’s get the facts straight. We don’t know if the Chinese economy will actually slow down, but even if it does, despite its populace, it’s GDP is still smaller (or close) than France. I don’t remember seeing a selloff in the US markets because the some incident in the French economy. A slowdown in the Chinese economy would have a significant impact on commodities and companies that produce them, as Chinese demand was the recent driver of commodity prices. However, a market selloff was telling investors that ‘as goes China, goes the U.S.’ – that is not the case. The inverse is more likely to be true. That was not why the market was down. Slower growth of the Chinese economy or even a dramatic slowdown is likely to shave off small bits of our domestic GDP growth – we sell a lot less to them, than they sell to us. In fact, the Japanese economy, which is three times the size of the Chinese economy, was in a dramatic recession for the past 15 years. However the US economy enjoyed some its best years of prosperity, during this period.
Investors should check their portfolio for exposure to the health of the Chinese economy, but that is something they should do regularly anyway. They should look at how much of their companies’ sales come from China. You don’t want to have a portfolio full of companies that sell only to the Chinese. Also make sure that you don’t have a portfolio full of commodity stocks, as they’ll be on the frontlines of the casualty list if the Chinese economy weakens dramatically. This drop in the market has created buying opportunities. Many U.S. companies that declined in price are not greatly impacted by what happens in China, or even by a slower growth rate of our economy.
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6 Comments Add your own
1. john h abeles md | February 28th, 2007 at 2:53 pm
One could argue that a Chinese economic slowdown — and a softening demand for energy therfore — could lower domestic oil prices and hence enhance our economy.
2. Reader | March 1st, 2007 at 3:20 am
Really???? According to CIA report dated on 2-8-2007. China had an est. 2006 GDP (purchase power parity) of $10Trillion only second to US and EU. France had only $1.87Trillion.
3. China Law Blog | March 1st, 2007 at 2:33 pm
China’s stock market plunge is not a reflection on China’s economy. It was a reflection on rumors of new stock trading and taxation laws. For years, China’s markets went down while its economy boomed. China’s stocks are NOT a good indicator of China’s economy as a whole.
4. Vitaliy | March 1st, 2007 at 5:13 pm
John, it could have that impact. In fact could be a bit deflationary for the U.S. economy, keeping our interest rates lower. Though on another hand, if Chinese decide to sell the U.S. dollars that would drive our rates higher.
Reader, purchasing power parity number are not as important when you try to gage the impact of one economy on another.
Dan (chinalawblog.com). I don’t disagree with you. There is a difference between a stock and a company and thus there is a difference between a stock market and the economy. As I understand the Chinese stock market got fairly speculative and expensive over last year. High valuation works like a one-sided leverage – good news doesn’t much to it (it is already priced into it) – stocks don’t go up much, but the bad news sends it down in a Chinese second. You are arguing the “bad” news was not really bad news. You might be right about that. As I’ve said many times before we’ll know about the problems with Chinese market not from government statistics (which you cannot trust), but from anecdotal evidence of companies doing business in China or simply after the fact.
5. Tomo Ivovic | March 2nd, 2007 at 9:15 pm
The US is in decline.
The future will be determined by the new powers.
Vitaliy should know better.
Obviously none of you have seen a crash.
YET!
6. M. Toscano | March 5th, 2007 at 4:00 pm
Hi, this is my first comment. first of all congratulations for your website, you have interesting analysis.
about China, I think that it remind me like in dot.com period. At that time everything was tech rose up, now everything sell in China/india rise as well. I write from Italy and i saw some italian stocks to rise to very high price levels just because they thought to open business in Asia. Even if results were getting worse…
second, i think that with the idea of Us going to slow, market investors assumed that China and Asia will be able to allow USa just to slow… and not get a recession…and later start another period of economic expansion. Recently they realized that China could slow as well and government wants their stock bubble to reduce (before burst), therefore we had some repricing of risl helped by unwinding of carry trading.
I have a scenario about stocks: 2007 reminds me like 2000….will happen the same? Only the future can know! But i think is time to have a conservative portfolio.
Ciao
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