Why the Chinese Stock Bubble is dangerous to us in these here parts

Excellent commentary on the significance of the Chineese market comes courtesy of the Prudent Bear and Rob Peebles:  This won't hurt a bit.

While many commentators today acknowledge that we have a gloabl economy with a remarkable correlation in the performance of global equity markets to date, when it comes to the looming dangers of a Chinese stock market crash, some compartmentalize thinking and say that a crash there would be a non-event for the rest of us.  CNBC hosts and guests were postulating this “we're all safe over here” theory again recently.

In case anyone has missed it, here are some recent stats on the Chineese market:

-Almost as many brokerage accounts were opened in April (4.5 million) as in the entire first quarter.

-60-70% of Chinese investors are retail individuals rather than professional managers

-many employers there allow workers that have a trading account, a one hour break each day so that they have time to buy and sell some stocks.

-China's market is valued at more than 70 percent of its GDP vs. a mere 15% in 2001
 
,-Former Chinese central banker Yu Yongding told AsiaOne News that once the bubble bursts, “…it will have an immeasurable impact on the economy and social stability.” Not only that, with all the borrowing to buy stock, a crash would precipitate a slew of new banking problems. “I think an impressive proportion of bank loans must have been used to punt on the stock market, although it is hard to measure exactly how much,”
 
The reality:  As MarketWatch’s Jonathan Burton points out:
 
-Chinese stocks are a big deal in the global scheme of things. They make up 10% of the MSCI Emerging Markets Index, perhaps the most popular benchmark for emerging markets. 
 
-International fund managers have at least that 10% exposure
 
-Mutual funds dedicated to China attracted about half of the $24 billion that went into emerging-market equity funds last year.
 
-Also many A share stocks trading in China also trade H shares in Hong Kong.
 
Despite CNBC’s assurances, it’s difficult to believe that dip in Chinese stocks won’t take markets around the world lower.   Just as it did in February.
 

 

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