China is in the news every day. But much of what you read about China may be missing the mark. Here’s why:
This crazy volatility in the Chinese stock market is nothing new. Since 1994 there have been 31 bear markets in China where the market has been down over 20% or more. In the same period, there have only been two such declines in the S&P 500. The takeaway? A downturn in China does not mean one is headed to the U.S., and Chinese volatility often has little effect on U.S. markets.
What happens in China’s stock market should stay in China’s stock market. Foreign investment is still largely restricted in China, and foreigners own less than 2% of the market value of the Chinese stock market, which is dominated by Chinese retail investors with small account balances. So a decline in China should not be a big deal for U.S. or other non-Chinese investors. (Most non-Chinese investors buy Chinese companies on U.S. or Hong Kong stock exchanges.)
Slowing growth in China is nothing new, and shouldn’t be making news. Growth has been decelerating in China since 2007, so the “slow growth” story is not news. It’s normal for a maturing, transitioning economy. However, the size of the overall Chinese economy is growing, so even with slowing growth, the long-term opportunities there remain huge.
The transition away from manufacturing and toward the service sector is already successfully underway. In fact, services outstripped manufacturing several years ago. China is now the second largest economy in the world, with sizable exports and imports, but it no longer “lives to export.”
China’s commodity imports are still growing and it remains the largest commodity importer in the world. In volume terms, China is importing more commodities each year than the year before (including more oil). But due to currency exchange rates, the value of imports is down. China and its demand level is not the cause of lower oil prices; in fact, Chinese oil imports are up. The problem with oil is excessive supply, not inadequate demand.