We’re all Shanghai gamblers now
You might think yourself a fairly cautious investor. Maybe you dabble in a few shares and unit trusts, probably in major, well-established markets such as the US, Japan or Germany, as well as London. Emerging markets, and in particular the wild frontier that is China, you might reckon best left to professionals. And if you do occasionally take a few exotic punts, you’re very likely to restrict them to 10 per cent or so of your portfolio.
But if you believe your exposure to the great Eastern dragon is modest or negligible, you’re wrong. It turns out that we’re all playing the Shanghai market now. Where once global stock markets took their cues from the Dow Jones or the S&P500, the two big American indices, they are now increasingly led by something called the Shanghai Composite. This benchmark index for Chinese stocks sets the tempo to which other global markets dance. If it’s up overnight, Europe rises — and New York later in the day. When it’s down, the rest of the world follows. So actually, it doesn’t matter much what you decide to do with your money: what happens to it will be heavily influenced by the fevered traders and gamblers of the Shanghai bourse.
Just take a look at the figures. In 2008, the Shanghai market fell by 65 per cent, leading the rest of the world down. In the first six months of this year, it rose by 63 per cent, leading global markets back up again. True, Shanghai took a wobble in August that didn’t spread around the world, but people close to the markets reckon the mood is now generally set in China. ‘European equities rise and fall with the ups and downs of the Shanghai stock indices,’ argued Monument Securities economist Stephen Lewis in a recent report.
A close analysis of day-to-day correlations between Shanghai and the S&P500 shows how Chinese influence on global investor sentiment is growing. Two years ago, according to calculations by Brown Brothers Harriman, the correlation was weak, at only 4.5 per cent, meaning trends were rarely replicated from one market to another. This year, the correlation doubled to 9 per cent, and in the past three months it has doubled again to 18 per cent. There is an even stronger correlation — 75 per cent — between the Shanghai Composite and the VIX index, which tracks expected volatility in the futures market. Translated out of bankers’ jargon, that means the global markets now look to Shanghai for future shocks. When it wobbles, the whole financial world cries ‘Yikes!’ and dives for cover.
To some extent, that is an entirely rational response to the importance of China as the world’s fastest growing major economy. As the rest of us remain stuck in recession, or with very low growth, it is to China, still expanding at more than 8 per cent a year, that we will look for any boost to global demand. If the world economy depends on what happens in China, and if the Shanghai Composite is a fair measure of China’s economic health, then it makes sense for global markets to follow its lead.
And it is home to some mighty companies as well. Shanghai is now the second largest stock exchange in the world, measured by market capitalisation: it overtook Tokyo in July this year. Of the four biggest companies in the world, again by market value, two are members of the Shanghai Composite: PetroChina, and Industrial & Commercial Bank of China (China Mobile, the world’s fifth biggest company, is listed on the rival Hong Kong exchange).
It makes sense for global markets to be driven by what’s happening to some of the world’s biggest stocks. In another sense, however, it is completely bonkers for the world to be taking its cues from Shanghai. To portray it as an old-fashioned gangster market, with some opium-fuelled Mr Chan sitting in a dark basement waving a chopstick to indicate whether the market should rise or fall, would be an outdated view. It’s a lot more sophisticated than that. Even so, the Shanghai Composite is hardly a normal index by Western standards. It is heavily manipulated by the government. It lacks transparent rules governing which firms can be listed and what they should disclose. It is not fully open to foreign investors. And local Chinese investors are inveterate gamblers who have always thought of stock markets as casinos without the neon lights and cocktail bars, rather than places for serious analysis of companies’ performance. Lord Turner of the Financial Services Authority would probably have a heart attack if he took a close look at what makes the Shanghai bourse tick.
Indeed, a world where the markets are increasingly led by the Shanghai Composite will be one in which we have to accept that every investment — and every British pension fund — is at the mercy of the Chinese Communist Party, triad gangs, and some of the world’s most volatile speculators. It is hardly a comforting thought. Still, no one ever said investing was for sissies.
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