Is China’s Stock Market Really that Bad?

I’ve been a snowboarder for about the last 15 years. I don’t get to go all that much. But when I do, I’m more than capable of handling a black run or three.

Often black runs will be near the top of a mountain. That’s because there is usually where the steepest gradient is for the run, increasing the level of difficulty.

There’s nothing quite like being up at the top of a mountain. Standing there, strapped in to the snowboard, looking down on the world. On a clear day you can see for miles. And you literally feel on top of the world. Then to turn the board down the mountain and let loose is a truly freeing experience.

One of the places on my ‘bucket list’ of ski resorts is Chamonix in France. Apparently it’s amazing, and hopefully in the next 12 months I’ll get to try it out. But one of the other appealing features of the Chamonix resort and surrounding area is Mont Blanc.

At 4.8km above sea level, it ranks 11th in the world for topographical prominence. In other words, it’s one of the world’s great climbing mountains. Now, I’m no climber. I have no desire to climb Mont Blanc. I’m there for aesthetic appeal of the mountain only.

But many people do try and climb Mont Blanc. The Mont Blanc safety organisation, La Chamoniarde, says as many as 400 people a day make the climb at the peak of the season.

Unfortunately, many people also die while climbing Mont Blanc. In 2012, 20 people died while attempting the climb. Again in 2014 20 more died. In fact, since 2004 165 people have died trying to climb Mont Blanc. That’s more lives lost than on Mt. Everest.

Mont Blanc is dangerous. You only need to look at the mountain profile to understand its hazardous nature.

Source: MashableClick to enlarge

What I find particularly amusing though is the profile of Mont Blanc is remarkably similar to another dangerous peak I’ve seen recently.

The only major difference in these rocky profiles is one of them isn’t a mountain at all.

Mountain or market?

In fact it’s the Chinese Stock Market.

Source: BloombergClick to enlarge

The profile of the Shanghai Composite doesn’t match Mont Blanc perfectly. But I can tell you that they’re both dangerous places to be.

Of course it’s unlikely the Shanghai Composite has cost physical lives. But I’m confident it’s cost a few financial lives.

The fall from June 2015 to the end of August 2015 was extraordinary. And the further falls since the beginning of this year have also been significant, and just as devastating.

On Thursday the Chinese stock market was open for a whopping 29 minutes. The market fell so fast that a market wide trading halt was put in place…again. That makes it twice this week the market was shut because of excessive swings.

Just wait until it happens again. And again. And again.

But what if it doesn’t happen again? Right now there is global hysteria about the Chinese stock market. Every major news site has it plastered across their homepage. The BBC, Bloomberg, New York Times and Financial Times all have it running as the lead story.

I love it when the media jumps onto shock events like this. If you were an alien that had just crash landed on earth you’d think the world was about to end. Well, here’s the real newsflash; the world isn’t ending, and neither is China.

Actually if you take a long term view of things, maybe it’s not as bad in China as the media would have you believe.

Is it that bad? Well, it’s better than the ASX

I decided to run a five year comparison between the Shanghai Composite and the ASX All Ordinaries. And would you believe that after the giant crash in 2015, and even after the falls this year, the Shanghai Composite is still outperforming the All Ordinaries?

In fact the Shanghai Composite is just over 10% in front of the All Ords.

Source: BloombergClick to enlarge

That’s pretty astonishing in my book. Of course, the Chinese market is far more erratic than the Aussie market. But I think it’s fair to assume that was always going to be the case for an economy that’s seen unprecedented growth over the last decade.

However is the Chinese market in real trouble? Will that 10% lead on the ASX All Ords fall aside? Will the Chinese stock market continue to see massive falls like it did last June?

I don’t think it will. There’s a fair bit of hysteria around at the moment. You can clearly see that the dramatic rise in the Shanghai Composite was unsustainable. No stock market can climb that high, that fast and continue to do so without a major correction. And correction is exactly what we got. To be fair, it’s what we’re still getting.

I wouldn’t be surprised to see the Chinese market have a few more days of mayhem and hysteria, and then bounce back and sit around par with the ASX All Ordinaries over the rolling five year window.

Let’s also get something else straight, China’s economy is massive. The country is in the middle of a huge shift from a producer economy to a consumption economy. There’s 1.3 billion people that hold the potential to turn China into a modern consumer society.

This will come, and it will take a number of years as China slowly (very slowly) becomes a more free market. There will be increasing demand for goods and services like education, healthcare, and consumer products.

Chi Fulin, President of the China Institute for Reform and Development says,

The huge consumer demand of 1.3bn people is China’s biggest advantage. Expanding domestic demand and boosting consumption will have great impacts on its economic growth in the next ten years. It will drive the economy at an annual growth rate of around 7% in the next ten years. In 2020, China’s final consumption rate is expected to reach 60%, with residents’ consumption rate around 50%. Driven by such a huge consumer demand, it is possible for China to maintain an economic growth rate of around 7%.

If Chi Fulin is right, and I suspect he might be, then China’s not going to have a hard landing. In fact there will be no ‘landing’. China will continue on track to become the most economically dominant country in the world.

And as for its stock market? For a while things will be rocky, a wild ride. But longer term I think times like this could provide a number of opportunities. It might be a great time to buy some discounted Chinese stocks.



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Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

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