ALERT: Extremely Important Update About What Is Really Happening In China

With so much speculation about what is unfolding on the heels of China’s recent stock market plunge, here is an extremely important update about what is really happening in China.

What Is Really Happening In China?
August 21 (King World News) – Here is a portion of an extremely important note (today) from legend Art Cashin: The Chinese Economy Versus The Chinese Stock Market – On Friday morning, my pal, Bob Pisani of CNBC sent out this note to a variety of traders: 

Does China’s stock market really reflect the state of the Chinese economy?
China’s stock market is in terrible shape, but it may not reflect the state of the Chinese economy. 

President Trump’s National Economic Council chief, Larry Kudlow, raised eyebrows yesterday when he said in a meeting with President Trump that China’s economy “looks terrible.” 

But is it really? Most estimates for China’s 2017 GDP growth remain near 6.5 percent. That doesn’t mean there aren’t concerns: new U.S. tariffs on China are making it more costly for companies there to operate, and China’s central bank has recently been pumping money into the economy. 

Mr. Kudlow may simply be looking at the Chinese stock market–the Shanghai exchange is 25 percent off its highs hit at the end of January–and assume that it reflects a dramatic deterioration in the Chinese economy. 

That, some traders say, would be a mistake. 

“I think our dear friend Larry Kudlow is off the mark,” Art Cashin from UBS said on CNBC yesterday. “In highly efficent full-production places like the U.S.. the stock market is reflective somewhat to what the economy is doing. But there’s almost a total disconnect in China,” he said. 

Nick Colas, who runs market analysis firm DataTrek, agrees: “The Chinese stock market actually tells us very little about the country’s economic welfare and doesn’t play anywhere near as dominant a role in the lives of its citizens as the US equity market does in America,” he wrote in a recent note to clients. 

Colas backs up his assertion by noting that the Shanghai Composite trades for less than half its October 2007 peak, yet China’s economy in the 11 years since has more than tripled to $13 trillion. 

The Shanghai market staged a huge rally from 2014 into 2015, more than doubling in value, but again collapsed and is trading 45 percent lower since 2015. 

“This decline has had no discernable impact on consumer spending or business investment over the last 3 years,” Colas said. 

Colas also cites a September 2017 Bloomberg article noting that retail investors account for 80 percent of the trading volume on the Shanghai exchange. Colas believes those traders can cause individual stock prices to swing wildly on arbitrary and non-economic information. 

Bottom line: he agrees with Cashin’s point that the Chinese stock market is not very efficient and does not necessarily reflect underlying economic realities. 

Finally, Colas notes that the allocation of household wealth to stocks in China is relatively miniscule: four percent, versus 23 percent in the U.S. China households have far more of their wealth in cash (20 percent vs. 4 percent in the U.S.) and real estate (65 percent vs. 45 percent).

And what about the super-rich? Colas notes that they tend to invest in private equity and venture capital rather than core holdings in stocks. 

The fact that China’s stock market does not necessarily reflect the state of the China economy has important policy implications: “Further declines in Chinese equities are unlikely to push the country’s leaders into an unfavorable trade deal with the US. Stocks are just not a large enough part of household net worth there, and the country has a long history of growth despite equity market volatility,” Colas says. 

Hopefully, we’ll not confuse China’s economy and stock market in the future. A big hat tip to Nick C.

***KWN has now released the powerful audio interview where Gerald Celente gives a sneak peak look at the just-published Trends Journal and also discusses the recent smash in the gold and silver markets and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.

ALSO JUST RELEASED: Underneath The Markets Chaos Is Brewing As U.S. Dollar Weakens And Gold Stabilizes CLICK HERE TO READ

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