Cramer: Don't underestimate China

Cramer: Don't underestimate China
Cramer: Don't underestimate China   

The world now knows that China is in big trouble. But Jim Cramer recalls just a few weeks ago when the stock market was flying high and investors were flocking into the Chinese stock market. Things can change quickly!

So, does that mean China could pull off a turnaround just as fast?

Cramer sees the 36 percent decline in the Shanghai Composite from its peak a little less than a month ago as one that looks remarkably similar to the crash of the Nasdaq after it peaked in March 2000.

"China's government seems as hapless as the little Dutch boy with his fingers in the dike, while millions of people watch their life savings disappear," the "Mad Money" host said. (Tweet This)

Thus, in an attempt to stop the sell orders from flowing, it froze trading in many stocks and margin calls and made short-selling a crime.

At this point, Cramer thinks the once-invincible Communist Party looks more like a clown show, and the world is questioning whether China's growth will decelerate so much that it leads to a decline in purchasing power from the stock market fallout.

An investor smiles while observing the stock market at a stock exchange hall in Huaibei, China.
ChinaFotoPress | Getty Images
An investor smiles while observing the stock market at a stock exchange hall in Huaibei, China.

The downturn has become so bad that Cramer has heard that there will be weaker auto sales and a slowdown in cellphone sales as a result. This explains why General Motors' stock has been hammered lately, since it sells more cars in China than in North America. That also explains why Apple's stock has been slammed, taking many of its semiconductor friends down with it.

Now that all of the negatives of China are out of the way, what about the positives?

In fact, the Chinese market had a breather from the selling this week and it roared with back-to-back 5 percent rallies.

"Which makes me wonder whether it's possible that all of the government's widely scoffed-at measures….may actually be working?" Cramer asked.

Historically, the measures that the Chinese government put in place tend to fail. However, what matters most to the "Mad Money" host is the velocity of the decline, and he thinks it is worth asking if the Chinese government's decision actually created a better backdrop that could really slow down the decline.

And sure, the Chinese Communist Party might look like it has lost its nerve and its brain, but Cramer reminded investors that it is a totalitarian state. If the U.S. government tried to implement these various bans, investors would just try and get around them. But in China, you could end up in prison, or worse, if you tried to.

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In fact, the use of margin has reduced dramatically in China which is good for stabilization and makes its market less prone to shock.

So, while Cramer is not saying that everything is rosy sunshine in China, he doesn't want investors to underestimate it, either.

"Yep, China screwed up, we all know it. But historically it's been wrong to underestimate the Chinese Communist Party's ability to keep growth going in order to maintain civil order, something that's always in question, and after this vicious decline, it might be a mistake to underestimate them again," he said.

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