Marketing in China

China’s Stock-Market Red Herring

With the Shanghai Stock Exchange Composite Index down more than 40% since last June, investors worldwide are watching the decline with growing concern, viewing it as evidence that China’s economy is going down the tubes. In fact, those seeking compelling clues about China’s economic future should look elsewhere.

ROME – With the Shanghai Stock Exchange Composite Index down more than 40% since last June, investors worldwide are watching the decline with growing concern – but not because they are invested in the plummeting market (China’s stocks are overwhelmingly held by Chinese). Rather, the fear is that plunging equity prices mean that China’s economy is going down the tubes. But those seeking compelling clues about China’s economic future should look elsewhere.

Of course, it is true that China’s growth rate has slowed substantially, and there are plenty of reasons to believe that the deceleration is not temporary. But none of those reasons has much to do with the stock market.

This disconnect is apparent in the fact that market prices are higher today than they were in 2014, the year when China surpassed the United States to become the world’s largest economy (in terms of purchasing power parity), a development that spurred bullish expectations. What observers at the time did not seem to recognize was that China’s economy was already slowing. According to official statistics, the growth rate averaged 10% in 1980-2010, but fell to 7-8% in 2012-2014.

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