Controlling Chinese Equity

It occurred to me this past weekend that I’ve been writing a lot about China stocks in recent months and that Greenspan’s warnings about China’s equity markets should be taken seriously.

Much like what happened to our domestic stock market throughout history, China’s newfound wealth is putting a lot of cash in the pockets of investors. This cash has to go somewhere, and many are putting it into the equity market. With such a large population investing their new wealth, the main stock market averages are at record highs and the risk of a bubble is very real.

Over the last several decades, Asian stock markets have tended to be more volatile than Western stock markets. American markets have, for the most part, traded based on their own fundamentals, mostly ignoring what was happening with the Asian Tigers. This trend has changed.

Only recently did the Dow, S&P 500, and NASDAQ experience a short-term selloff, due to Chinese stock markets taking a dip after government officials mused about trading curbs. As I remarked in this column at the time, it seemed like this was the first time American equity markets took their lead from Chinese markets. It wasn’t Japan affecting domestic stock prices, it was China.

So with China’s growing influence, it’s a new era in the financial world. This is no big news. It’s important, however, to consider just how risky China equities are right now. This includes Chinese businesses that only trade on American stock markets.

I think it’s reasonable to conclude that a major correction in the Chinese equity market is inevitable. So just make sure that you aren’t betting the farm on an economy and financial marketplace where we have no say. In my opinion, Greenspan’s warning is bang on!