SINGAPORE (Oct 15): Does the Shanghai Index reflect the real state of the Chinese economy? Having spent several weeks in China over the past few months, the answer has to be “no”.
There are several reasons for this. The most important is the role that the financial market plays in the economy. In the US, and in most Western countries, the financial market is seen as a store of wealth. People “invest” in the market, entrusting their savings to mutual funds, fund managers, exchange-traded funds and direct investing. In this way, there is a more direct connection between the health of the economy and the performance of the market.
The financial markets are not seen as a store of wealth for most Chinese. It is one means of creating wealth through capital gains. This is no different from the Western approach, except that Chinese investors are more rigorous in cutting losses and getting out of trades rather than accepting advice to hold on for the long term.