The Chinese Stock Market Does Not Matter!

The first thing people need to understand is that China’s stock market does not represent or correlate to anything other than China’s dysfunction.

Back in August during the first part of the China stock market collapse the satire website TheOnion.com wrote this:

Shoddy Chinese-Made Stock Market Collapses

SHANGHAI—Proving to be just as flimsy and precarious as many observers had previously warned, the Chinese-made Shanghai Composite index completely collapsed Monday, sources confirmed. “Sure, it looked fine from the outside, but anybody who saw it up close knew that it was of such poor quality that it wasn’t built to last,” said Allen Sigman of the London School of Economics, adding that the stock market, which he described as a crude knockoff of Western versions, was practically slapped together overnight and featured countless obvious structural weak points. “They pretty much ignored regulations, and inspections were a joke. The only surprise is that it didn’t fall apart sooner.” Sigman added that he just hopes there weren’t too many people who were hurt in the disaster.

Despite being written as satire it is pretty spot on. The Shanghai stock market really is a shoddy knock-off of Western markets. The Chinese market has a long history of booms and busts for no reason or any reason at all. The market is not well regulated. There is very little reliable financial information for the companies traded on the market. The traders and investors in the market have very little education (most have less than a high school diploma). Add all this up and it’s just a crazy casino game being played by relatively few people in China. Stocks only account for about 9% of household wealth in China.

It’s also important to keep the recent history of the Chinese stock market in mind. Below is a chart of the Shanghai Index over the last decade with the current boom highlighted.