Originally produced on Jan. 11, 2016 for Mauldin Economics, LLC
By George Friedman
The Chinese stock market fell dramatically last week. That sounds significant but it actually isn’t. First, the Chinese stock market doesn’t serve the same function as Western markets. The equities that are sold there do not allow shareholders to control companies, nor are the underlying values of these companies correlated to the price of the stocks in any way. Second, the percentage of China’s wealth that flows through the markets is relatively small compared to the size of China’s economy. Market capitalization has little to do with value of Chinese companies.
The really significant news last week related to China’s foreign reserves. The People’s Bank of China revealed on Jan. 7 that the country ended 2015 with less foreign reserves than it started the year with. It was the first time reserves shrank over the course of a year since 1992. In effect, China saw its first decline