Don’t blame China for what’s ailing U.S. stocks

October 1, 2015, 4:37 PM UTC
Global Markets Continue Last Week's Steep Decline
Traders work on the floor of the New York Stock Exchange (NYSE) on August 24, 2015 in New York City.
Photograph by Spencer Platt — Getty Images

U.S stocks on Thursday kicked off the start of October with losses, after nosediving last month as investors worried about slowing growth in China. True, the growth rate of the world’s second largest economy has declined from over 10% in past years to about 6% this year, but that in and itself should not be a concern.

China now has a more mature workforce with higher wages, and can no longer compete for every export on price alone. Its government realizes this fact and is attempting to convert their economy from one of foreign exports to domestic consumption that concentrates on services. In many regards, China is achieving the goal with services contributing somewhere close to 50% of Chinese GDP now, versus less than 30% five years ago.

A largely unrelated fact is that the Chinese stock market has now round-tripped for 2015, having started the year with large gains and given those gains back. However, China’s market is still up 29% from this time last year. The drop in prices was certainly exacerbated by the 10 to 1 leverage for individual investors allowed by the Chinese government. Many of these investors have very little investing knowledge, less than even the Chinese government.

Between the two, the slower growth and the market decline, many in the United States have speculated that there would be fewer iPhones, Nike shoes, automobiles, etc., sold in China. This thinking goes that fewer goods sold to the Chinese will drag down corporate profits of those selling to the Chinese. The negative wealth effect by their market decline on the average Chinese citizen will be small. It will have less impact on U.S. exports to China than expressed by many in the media. Only 15% of Chinese households have invested in their stock market, according to HSBC. Most Chinese store their wealth in cash, bank deposits and jewelry, not stocks.

Further, the recent focus on China’s declining stock market highlights that many don’t fully realize their market is not like the U.S. It is not a free market, and therefore is not predictive of future Chinese economic growth.

The U.S. market was not correlated to the Chinese market on its way up. Why would investors think the U.S. market will correlate to the Chinese market on its way down? Their entire market roundtrip took only nine months – six months rising and three months giving the gains back. The past month, China’s markets have been relatively flat, trading within a 10% range. The U.S. saw no broad gains when the Chinese market rose. Yes, the U.S. markets are linked, but they do not closely correlate.

The investment community has lost what confidence it had in the Chinese Communist central government. The Chinese have looked like the Keystone Cops, trying to artificially hold up the value of their market. Should anyone really be surprised that their market is falling? It was rigged to go up by the Communist central planners who, because they are Communists, do not have an appreciation for free markets. They thought they could control their market, but they have learned a hard lesson – a lesson that JP Morgan learned during the Crash of 1929 – that no one person, group or government can completely control the emotions and sentiment of people if they want to buy or sell.

Frank Beck is the President and Chief Investment Officer at Beck Capital Management, an investment management firm based in Austin, Texas. Bryan Anderson is the Executive Vice-President & Market Strategist with Beck Capital Management.

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