8/17/2018 China's stock market drop might not reflect its economic reality

TRADER TALK WITH BOB PISANI

Why the drop in China's stock

market might not reflect its
economic reality
National Economic Council Director Larry Kudlow raised eyebrows when he said
in a Cabinet meeting with President Trump that China's economy "looks terrible."
Kudlow may simply have been looking at the decline in the Shanghai stock
market.
But the Chinese stock market is not very efficient and does not necessarily reflect
underlying economic realities.

Bob Pisani | @BobPisani

Published 2 Hours Ago | Updated 1 Hour Ago

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National Economic Council director Larry Kudlow raised eyebrows

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But does it really? Most estimates for China's 2018 economic growth
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Kudlow simply may have looked at the Chinese stock market. The
Shanghai exchange is down 25 percent from the high it hit at the end

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8/17/2018 China's stock market drop might not reflect its economic reality

of January. He may have assumed that the decline reflects a A 29-year-old bought a
dramatic deterioration in the Chinese economy. $60,000 Tesla with a
credit card and earned
That, some traders said, would be a mistake. an estimated $5,000 in
rewards
"I think our dear friend Larry Kudlow is off the mark," UBS' Art Mark Cuban owns just
Cashin said on CNBC on Thursday. "In highly efficient full- a handful of stocks and
production places like the U.S., the stock market is reflective tons of cash because
somewhat to what the economy is doing. But there's almost a total he's worried about the
market
disconnect in China," he said.
White House economic
Nick Colas, who runs market analysis firm DataTrek Research, advisor Kudlow says
trade deal with Mexico
agreed. "The Chinese stock market actually tells us very little about
is 'getting close'
the country's economic welfare and doesn't play anywhere near as
Cramer: Forget FANG,
dominant a role in the lives of its citizens as the US equity market
the market loves
does in America," he wrote in a recent note to clients. WANG

Colas backed up his assertion by noting that the Shanghai US reaps more than
$1.4 billion from steel
Composite trades for less than half its October 2007 peak, yet
and aluminum tariffs
China's economy in the 11 years since then has more than tripled to
Harley-Davidson CEO
$13 trillion.
pushes back on
political criticism in
The Shanghai market staged a huge rally from 2014 into 2015,
internal memo—but
more than doubling in value, but again collapsed and is trading 45 does not mention
percent lower since 2015. Trump's name
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"This decline has had no discernible impact on consumer spending TRENDING NOW
or business investment over the last 3 years," Colas said.
1. A 29-year-old bought
a $60,000 Tesla with
Colas also cited a September 2017 Bloomberg article noting that
a credit card and
retail investors account for 80 percent of the trading volume on the
earned an estimated
Shanghai exchange. Colas said those traders can cause individual $5,000 in rewards
stock prices to swing wildly on arbitrary and noneconomic
information.
2. Tesla shares are
getting slammed
He agreed with Cashin's point that the Chinese stock market is not after Elon Musk's off-
very efficient and does not necessarily reflect underlying economic kilter interview with
realities. the NYT

Finally, Colas noted that the allocation of household wealth to 3. Trump pushes to
study an end to
stocks in China is relatively minuscule: 4 percent versus 23 percent
quarterly earnings
in the U.S.
reports to help
business do 'even
In China, households have far more of their wealth in cash (20
better'
percent versus 4 percent in the U.S.) and real estate (65 percent

4.
versus 45 percent). White House's
Kudlow says China
And what about the super rich? Colas noted that they tend to invest looks 'terrible.' Data
in private equity and venture capital rather than having their core show otherwise.
holdings in stocks.

The fact that China's stock market does not necessarily reflect the 5. Special counsel
Mueller has 1,000-
state of China economy's has important policy implications:
plus exhibits for ex-
"Further declines in Chinese equities are unlikely to push the
Trump campaign
country's leaders into an unfavorable trade deal with the US," Colas boss Manafort's next
said. "Stocks are just not a large enough part of household net worth trial
there, and the country has a long history of growth despite equity
market volatility." 
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8/17/2018 China's stock market drop might not reflect its economic reality

Bob Pisani
CNBC "On-Air Stocks" Editor

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