Casino (noun): a building or room used for social amusements; specifically one used for gambling.
Chinese stock market: see casino.
U.S. stocks ushered in 2016 with the worst opening week in history. With the major indices off more than 6 percent, investors scrambled to identify the cause of the selloff. One suspect quickly fingered was the Chinese stock market, which plunged over 7 percent each of the first two days of the year and triggered automatic "circuit breakers" that shut down the exchanges.
Chris HopkinsWow. Volatility in the Chinese stock market. Who knew?
There are clearly fundamental concerns over the slowing pace of China's economy, and government officials' response to the stock market turbulence was ham-handed at best. But in terms of the real impact of China's stock market on U.S. investors? Meh.
America's economy is the most robust in the world for many reasons, not the least of which is a broad and stable capital market that efficiently allocates investment funds into productive uses in private industry. The rise and dominance of the U.S. stock market is an essential cornerstone of this capital allocation process and assures that investors in promising enterprises have an avenue to exit positions efficiently by selling their holdings in a liquid secondary market.
The Chinese bourses bear little resemblance to Wall Street, and their recent volatility is not a significant causal factor in the U.S. stock market slide.
Unlike the U.S. economy dominated by private enterprise, most of China's major corporations remain government-owned and controlled. Large cap stocks trading on the Shanghai and Shenzhen exchanges represent only a small minority interest in those entities, hence shareholders enjoy almost none of the benefits of private ownership accruing to U.S. stockholders.
Furthermore, stock markets in China are predominantly recreational and are populated with individual investors as opposed to institutions like mutual funds, ETFs and hedge funds. According to a Reuters estimate, 85 percent Chinese stock trades are retail orders from individuals, most of whom are not high school graduates. Of the more than 200 million brokerage accounts, 90 percent belong to individuals. And much of that recreational speculation is being done with borrowed money; margin debt (cash borrowed to buy stocks) in China is roughly double that in America as a percentage of market size.
In fact, the Communist Party has been encouraging public speculation and effectively cheerleading for the markets over the past couple of years. The Party newspaper People's Daily published an editorial last April exhorting individual investors to jump in despite the fact that Chinese markets had nearly doubled in less than a year. The result was an additional 38 million accounts opened by small investors including many retirees who routinely show up at the exchanges to lounge in theater seats and place their wagers. New Yorker columnist Evan Osnos described the scene of rapt attention to giant digital monitors as being "like visitors to the dog track."
Government interventions into the market following the July crash also conveyed a clear sense of amateur hour. Holders of more than 5 percent of a company's stock were forbidden to sell, the Chinese government aggressively bought shares of company stocks on the open market, and the Party threatened to imprison investors who made derogatory comments about traded firms. Not much resemblance to a "market" here.
Someday, presumably, China will assume the mantle of a responsible global power with a stable and efficient capital market. But not yet, and the recent adventures of its adolescent stock markets remain far removed from serious American investors.
Christopher A. Hopkins is a vice president and portfolio manager for Barnett & Co. in Chattanooga.