Flattering China Sneeze

 August 30, 2009;  04:18:35  by Huang XiangYuan

Recently China stock markets crash has become a bracing issue for overseas media, and also they have turned their attention to the effects of China stock markets crash to the global stock markets.  An article on UK Finanacial Times has raised a puzzling issue: “What happen to the world if China sneeze?”

Although it may not be comparable to the world shocking of a 8.9% single day crash of China stock markets of July 26, 2007, but two years later in a span of less than twenty days we had three to four single day decline of about 5%, and if we include those midday crash of about 3%, then it has a total of not less than eight to nine crash-like down days.  These abnormal performances, probably caused by abnormal issues, will attract attention of the world.

However, the interdependence of China stock markets with the world markets has reached a point where “if you pull a sting of hair it will affect whole body”, or have the global markets reversed trend since market rally from March 7?  They are some of the intriguing questions.

According to some data of an article on Financial Times, “In the twenty months since January 2008, the Shanghai Composite Index has moved for sixteen months in tanderm with United States S&P500, and achieving 80% degree of association.  Also, in the eighty-four months since January 2002 to December 2007, the Shanghai Composite Index has moved for thirty-seven months in tanderm with S&P500, with 45% degree of association only.  China and other Asian stock markets has a greater degree of association.  For the past twenty months, the Shanghai Composite Index has moved for seventeen months in tanderm with FTSE Asia Pacific Index, reaching 85% degree of association.

We are not going to doubt the reliability of these data, but, with a little common sense we find two different things: it means moving in tanderm for the whole month; or it means that the color of the monthly candles are matched on the last day close of the month.  There are different meanings for a candle that is long or short, or with or without long legs on both ends.. It may be over-simplified if the markets are compared with the color of their candles.  The devil is in the details, and the data for a month or even a year are not commonly used to determine the overall trend of markets association., rather it is determined by the pulse locus of a certain day or several consecutive trading days activities.  An analyst from Morgan Stanley also recognizes that the degree of association for China with United States is greater for the period of August 3 to 17 than all of 2009.  However, overseas media are also awared that the markets seem decoupled on Wednesday (August 19) where the Dow Jones Industrial Average was higher on Tuesday close, while the Shanghai Composite Index had a big decline.  On August 21, Wall Street Journal’s Matt Phillips wrote on his article “Market Pulses” that: “We thought that the market crash of China stock markets on Wednesday would induce a decline on United States markets.  We were wrong.  Investors were not bothered with the 4.3% decline of Shanghai Composite Index, rather they were attracted by better-than-expected United States economy.”  According to reports, three major United States indices were reaching new yearly high on that day.  Todate European and American markets activities are not in any way related to some far-fetched interpretation of market linkage characteristics.

When greater expectations were placed on China growth story and China will pull the world along story, and when they find that it is not really so, there may inevitably be cause for concern.  This is an example for saying when China sneeze the world will catch a cold, and it is obviously a misconception.  In this respect the stock market is not the main cause, or rather it is the China economy.  They are two very different concepts quantitatively and their relative importance.  China stock markets have not attained the role of an economic barometer because its market mechanism is not sufficiently perfected, and market performances still unmature.  On condition that not all investment stipulations are open to foreign participations, and except for the approved QFII program, not all foreign investors can participate in China stock markets, also the single-side trading system of China stock market are still unmature and not compatible with international market systems, we cannot say anything about China comparisons and leading role.  Citigroup market strategist Robert Beckland had mentioned that: “Maybe in a few more decade China might overtake S&P500 index.  But it is not now.”  In his view, the recent stock prices decline is not an indication that investors will believe that China stock market decline will kick off a prolong downtrend, or rather investors are finding an excuse to take profit.

Some columnist opinions of overseas media may have over exaggerated the market linkage characteristics of China stock market to global stock markets, or it may be exalting China, or there may be some hidden agenda.  What Federal Reserve chairman Bernanke had said recently about China high savings is causing collapse of United States housing prices, and some United States economists believe that United States economic recession is due to China exports, and blaming overseas stock markets abnormal movement on China which has no linkage at all, are all funny examples, and it is easy to pass the buck and blame others.  By the same token they keep blaming and embrassing China on issues of China Renminbi revaluation, push up domestic demand, etc., and their real intention is none other than asking China government to shoulder the administrative blame for regulating stock markets bubble. Simultaneously they hype their mirage on market linkage characteristics and raising many unrelated issues, but it is in fact what is known as asset price bubble.

Strange enough, China sneeze effect is not a false exalting or a real beating by overseas media, it is just because some of us feel flattered.  In the meantime the not well-defined market linkage characteristics has become a much sought after phrase..  Moreover, it is an excuse for some market forces to crash a market，and it is also an excuse for some economists to advocate a monetary policy for changing from “moderately relaxing” to moderately tightening” under premise of microeconomics theory.