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[Anomalocaris]

Chinese Markets Were Early to the Trade War Meltdown. Now They’re Not So Worried.

Trade headlines have kept investors on tenterhooks in recent weeks and left stock markets on Wall Street and across much of the world down.

Not in China though. The benchmark Shanghai and Shenzhen stock indexes hit their lows for the year on Oct. 18 after China’s government reported that the country’s economy grew at its slowest pace in nearly a decade during the third quarter. Since then, the two indexes are up 6 percent and 10 percent. By comparison, the S&P 500 has fallen more than 4 percent over that period.

Chinese equity market has been in an extended bear market for reasons not directly related to the trade war and immediate performance of the Chinese economy. This could simply be a case of what went down has to come back up. One might argue without the threat of trade war the Chinese equity market would have bounced back much more strongly.

Conversely the US equity market has been in an extended bull market for reasons not directly related to the trade war. This could simply be a case of what went up has to come back down. One might argue without the threat of trade war the US equity market would not have entered the correction so soon.

It is important to remember Chinese equity market represents a far smaller portion of the Chinese economy than the US stock market represents of the US economy. So the performance of the Chinese equity market is much less correlated to the performance of the Chinese economy. It is more reflective of how Chinese government policy affects the movement of wealth from sectors of Chinese economy reflected in the Chinese equity market to sectors of Chinese economy outside the equity market. Since the Chinese government is also far more heavy handed in its policies regarding regulating the flow of wealth within the Chinese economy, it is understandable why Chinese equity market is a poor bellwether for Chinese economy overall.