China has been making headlines as their stock market has fallen roughly 30% in the past few weeks. Earlier today, almost half of all listed companies in China voluntarily suspended trading of their shares, and over 800 other stocks had trading automatically halted after reaching their daily drop limit. We have seen spillover effects in the U.S. as our stock market has fallen over concerns about what the implications of the sell-off in China might be. During times of crises, it can be helpful to put things in perspective.
First, China’s stock market has risen an exponential amount over the past year. The chart below shows the Shanghai composite index performance over the past three years. This chart illustrates not only the outsized performance recently, but also how the market behaved prior to that. It is our experience that this pattern is very typical of a bubble, where investors are willing to pay much more for something than it is worth. As soon as some investors begin to exit, generally a mass exodus follows resulting in a crash which is what we’ve seen over the past few weeks. So while the drop of 30% over the past few weeks sounds scary, in reality the Shanghai Composite is still up 70% on a year-over-year basis.
consumption. Instead of allowing that transition to take place, the government stepped in and essentially filled in for the consumer by spending billions of dollars on new infrastructure. The idea was that somehow government spending would begin to fuel consumer spending. However, consumer spending is unlikely to pick up anytime soon because the average Chinese household saves about 30% of their disposable
income. In China, consumer spending represents about 35% of GDP, compared to the U.S. where consumer spending accounts for roughly 70% of GDP.
The bottom line is that the pattern of growth China experienced over the past few decades is simply not sustainable. Now, they are going through a painful period and the government is doing everything they can to prop up the markets. However, it is unlikely to work. In the long-run, adjustments are going to need to take place as well as expectations will need to be revisited as to just how much China can contribute to overall world growth.
What does this mean for the U.S. economy? Ultimately, the implications of a slowdown in China will depend on how much their economy slows. Take, for example, the fact that China’s GDP has fallen from 9.6% in 2008 to 7.4% in 2014 (a 23% drop). Over that same time period, U.S. GDP rose from -0.92% in 2008 to 3.66% in 2014. While it is true that a further slowdown in China will likely have ripple effects across the globe, the extent of which remains to be seen.
As for our TPFG Strategies, we have very limited exposure to China. Currently, the only exposure is within our Global Strategy and that is less than 3%. We are assessing the potential impacts to other markets as well and are prepared to make changes should we deem it necessary.
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