Volatile stock market = slowdown in China?
Since 2000, the Chinese stock market dropped by 5% or more on exactly 43 days (by my calculations).
Three of those sharp declines happened this year (as of January 11th):
But is there a historical link between the stock market and the real economy in China? At best, it is very weak:
Based on the correlation coefficient for China, a 15 percentage point fall in stock prices would be associated with 0.6 percentage point slower growth (0.038*-15=-0.57).
Why are traders forgetting that?
Or, does the average trader now believe that China's real economy became more correlated with stock returns? (And when was this supposedly new information revealed?)
The heightened sensitivity to developments in China would be sensible if market participants had just obtained new information about China's GDP growth (after a weekly adjustment of about 10% in Shanghai, "The Dow Jones Industrial Average dropped 6.2% last week, and the Stoxx Europe 600 tumbled 6.7%", according to WSJ calculations). But based on a period of volatile stock prices, can we actually conclude that China grow a lot slower than forecast?
Grep Ip and Bob Davis report:
Economists at UBS estimate that if China’s growth slumped to 4% this year (versus their forecast 6.2%), it would slice half a percentage point off U.S. growth, 0.8 point off Europe’s and 2.6 points off Japan’s.
A 2.2. percentage point adjustment is conceivable (rising defaults and many other risks are not guaranteed to be managed well). But if that happens, it will not be because the stock market was choppy in early 2016.