Tuesday, March 6, 2007

Was Last Week's Mini Crash "Made in China"?

There has been a lot of talk on how last week's rout indicates China's stock market has become an integrated part of global capital market. To put things in perspective, I've put togather the following data comparison from various sources(news releases from NYSE and SSE, CIA World Factbook):

                              China          US
GDP ($ Trillion)                2.50        13.22
                                SSE         NYSE
Total Market Cap.              895.15      24,500
Floating Shares                205.35         N/A
Percent of GDP                     8%        182%
2006 Volume (in $)            715.56       21,730
2006 Daily Volume (in $)        2.97        86.92
2006 Daily Volume (in Share)    3.41         2.35

* Dollar and share amounts in billions.
* Assume an average exchange rate of 8.
  • Although Shanghai Stock Exchange's total market capitalization is on par with its emerging market couterparts (Korea Stock Exchange, India's National Stock Exchange, for example), the actual floating (or tradable) shares only account for about $200 billion, less than 1% of that of NYSE.
  • In fact, several Dow components (GE, Exxon, Microsoft, etc) have higher market cap. than all SSE listed companies combined.
  • The stock market is not really an important source of capital for Chinese companies. They still rely heavily on traditional venues such as bank loan. The market cap. of SSE is only about 8% of China's GDP, the same number for NYSE is 182%.
  • Interestingly, the daily trading volume in shares on SSE is HIGHER than that of NYSE.
  • Currently the companies traded on SSE have an average P/E of 33.30. According to data here, the last time SP500 had such a high PE was between 1999 to 2002. We all know what happened after that, don't we?
So what's the conclusion? I don't think China was the cause of last week's global stock market plunge. It can only be the catalyst, at best. China's stock market has shown little correlation with Chinese economy in the past, let alone global.