The Chinese is Stock Market is Growing Up Painfully

When the physical growth slows and intellectual development reaches a peak, it can be a difficult time. As the father of a number of teenagers, I have found that the frequent, manageable toddler tantrums passed with relative ease. A few years pass, and then all of a sudden I am hit with a teenage tantrum, which can send shockwaves (particularly since one of my teenage kids is physically bigger than I am…).

The emerging economy and financial system in China has been developing quickly but many would say that it is now approaching maturity. It is testing its financial maturity against the world, but lacks the balance of a developed market, where institutional investors use research and experience to react to changes with a degree of measure. Of course, the biggest rookie investment error is to sell when market fall, only to crystalise losses. It seems as though the weight of rookies in China is bearing down heavily on share values.

Just prior to these drops, the sharp rise in Chinese stockmarkets had many of the hallmarks of a speculative bubble: High levels of private investor participation and large numbers of people borrowing to invest. So when Chinese investor greed transforms into fear we should not be surprised. This has happened many times in history over many hundreds of years. So why have the drops in China had such an impact on other markets around the world?

Part of the reason for the spread of fear has been the decline in commodity values. These declines in isolation should in fact encourage economic growth, making goods cheaper to produce. At a time when wages are starting to rise in the developed world, this should result in growth. But it is the message sent by falling commodity prices is different from the logical outcome, because this message is confirmation of slowing growth in the Chinese economy, as demand for raw materials eases.

I read an article a couple of years ago that predicted that in 2016, China would have ceased its expansion as an emerging market, and that growth rates would slow to more developed world rates. The reasoning was based productivity, where China was predicted to reach a theoretical maximum growth in GDP per capita, one never exceeded by any developing economy in history. It looks as though this prediction was extremely well informed and a clear sign that the Chinese (capitalist) economy is approaching maturity. China needs to adapt and develop more service based skills, to develop more sophisticated business lines.

So to bring my analogy full circle, I return to my experience of teenagers. You have to look beyond the surface of their sometimes difficult behaviour. If you can do this, you will often find a person with huge potential, capable of achieving more than the previous generation.

China’s economy is reaching maturity, but still undoubtedly growing. Stock markets behave differently to economies at times, and these markets suffer all the extremes of fear and greed. My hope, and expectation, is that the stock market falls are surface behaviour on a large scale. The size of China means we will inevitably feel its effects in other markets. Underneath, little is wrong, and perhaps we all need to adjust to a significant, developed economy to rival the US, the EU and Japan. But as with teenagers, the key is how we all choose to react to this behaviour, get it wrong and the situation can get out of hand…..

Andrew Moore
Investment Director and Partner

Posted In : Market Commentary, Borrowing