If China Bubble Bursts, Will Global Economy Notice?
We’ve been telling you of the huge run-up in the Chinese stock market lately. It’s had some froth let out in the past weeks, but the bubble still seems like it could burst for good any time now.
Reporting for CNBC, Cheng Lei looked at the day-to-day trading environment in China. She found that China’s 80 million retail investors don’t seem all that fazed about a correction in the market. Individual investors continue to pack into brokerage houses with unbound optimism. And bubble or not, it looks like that buoyancy among investors will continue – at least until the Chinese are allowed to invest in overseas markets.
But what are the global implications if China is indeed headed for a major correction? David Spika of Westwood Holdings Group was on "Squawk on the Street" to tell us. He says it will be a reflection of the decline in global liquidity. The Chinese market right now reminds Spika, as well as many others, of the U.S. stock market circa 1999 – a bubble on the cusp of being pricked. Sure, Chinese investors are doing research and not just blindly throwing their money into a soaring market, Spika says, but the question is if the information they are getting from the companies is complete and accurate.
He says the best way to invest in this uncertain marketplace is through U.S. multinational companies that are leveraged toward growth in China. He also notes that the number of individual Chinese investors is deceiving. The economy there is actually mostly made up of foreign capital and insurance companies.
The bottom line, Spika says, is that a Chinese bubble burst wouldn’t have as far reaching effects on the country’s economy as the 2000 U.S. market correction did. The economy in China is simply too diverse to be brought to its knees that way, he says, and he’s skeptical that the global economy would take much of a hit from it either.
Take a look at these two charts of the Shanghai Composite Index. The first is it's one-year performance, the second is it's one-month performance: