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China Stock Market Rout

Topic: International Stocks — China
Jul. 27 2015, 09:29 AM ET - by VF member bz1516 (2442 gold star (click for information on feedback))

China stock market rout is bad, but not sure what it means for us?

An 8.5% down day in China means most of the stocks there dropped the 10% daily limit. It also means they are likely to open lower tomorrow since the majority of the market could not drop more than the limit today. When you add in the fact that small retail investors make up the bulk of the market, and these unsophisticated investors are apt to react irrationally, they could easily get spooked and just avoid the market, further removing demand.

As bad as losing money in the market sounds it could even get worse as these same small investors start to spend less in the real economy, thus reversing some of the gains made in the consumer sector the past several years. The stock market can not only affect the desire to spend, but also it reflects some of the serious economic issues already in place in the economy. It is not a stretch looking at the economic numbers, commodity prices and the market to expect a serious recession in China.

The current situation also makes one think about the possibility of a depression in China, though that is far from the base case. The question for US investors though is how does all this affect us?

I don't think it has a big effect on our economy as trade with China is a small part of our GDP. Maybe it reduces our GDP by a few tenths of 1%.

Another way it can affect us is through earnings of Chinese subsidiaries of large US companies. KFC comes to mind here. Many US companies earn income in China, but only a few earn large portions of their income there. So that is something that has to be examined on a case by case basis.

A slowdown in China of course affects commodities prices which leads to further reduced earnings of mining and oil & gas companies, but that has been going on already for some time.

Barry

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China Stock Market Rout