There’s China And Then The Rest Of The World

Yesterday, the Federal government released the latest employment report. It was a shocking 40% higher than last month!  The employment report is a major indicator how healthy our economy is.  More employment translates into a growing economy, so you would think that’s good news for stocks.  But not yesterday. China’s stock market continued it losses on Friday, so despite good economic news the US stock market falls too. Why?

“Investors had long believed that Chinese economic policymakers were all but infallible-and that narrative helped sustained financial confidence around the world” so states Jason Zweig in today’s Wall St. Journal. Last year alone, the Chinese stock market was up 60% by June, but fell 50%.  I think investors are now getting a dose of reality about how the Chinese economy operates.

China’s financial markets are not governed the same way as the rest of the world. They don’t have regulations and agencies which press for objective clear financial information on Chinese companies. Indeed the ownership of companies is different from other parts of the world. China’s financial markets are controlled largely by politicians. Can you imagine our financial markets being controlled by a political party? In the view of the rest of the world, China’s policymakers fumbled this week by devalueing their currency and locking their stock market twice this week. They simply don’t understand how the financial markets work for the rest of the world.

I would expect an inexperienced investor to fall for the Great China Illusion, but I wouldn’t expect well-paid, experienced investment managers on Wall Street to fall for it too.