China vs US stock markets

What is China Doing to Its Stock Market and Why? A Hypothesis.

  • The US stock market is thriving while China’s stock market deteriorates.
  • China could intervene to limit stock market losses, but it is not. 
  • Is China purposely losing a battle in order to win a war?

Win the battle, lose the war.  Pyrrhus of Epirus, Greek king, and statesman in 270 BC  

While the US stock market continues to reach new highs, doubling in value since the March 2020 low (the fastest and largest correction on record), China’s stock market is in the doldrums. The S&P 500 index has returned 20% so far this year through mid-August while China’s A50 index has lost 15%.

Pundits attribute China’s stock market struggles to two factors — China’s central bank has withdrawn cash from the markets, and its government has stepped up regulations affecting the education and technology industries.

 

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The Chinese government appears to want a stock market correction. So, why are those guys going in the opposite direction of the US?

A striking difference…..

Unlike the US, China is not propping up its stock and bond markets with massive amounts of money, as shown in the following graph.

Money supply in China has remained stable while it has increased five-fold in the US, and there is another $4.5 trillion awaiting US legislative approval. 

 

Poking the bear

The US is poking the inflation bear, testing to see how much money printing will cause serious inflation, while proclaiming that current inflation is transitory. By contrast, China has refused to follow suit even if it allows its stock market to lose value. 

 

A Hypothesis: The war for economic superiority

Time will tell, but China may be purposely losing the 2021 stock market battle in order to win the long-term currency war. Economic domination is the ultimate goal.  

The Zero Interest Rate Policy (ZIRP) in the US and other countries like Germany cannot last because its costs are mounting — more and more money is used every day to prop up bond prices. 

The Fed’s announced tapering possibilities have set off alarms for good reason. The demise of ZIRP will burst the stock market bubble and trigger a debt spiral. 

A US loss is China’s gain. These are dangerous times for the US economy.

 

What should investors do?

Although it might not be patriotic, investors should keep an eye on the Chinese economy and stock market for possible investment opportunities.

In the US, the odds of inflation and a stock market crash increase every day, especially on those days when the market goes up or Congress passes another spending bill. Baby boomers are in serious jeopardy because they might not have the time to recover and most are currently in the Investment Risk Zone (the transition from working to retirement years) 

Investors should move to safe inflation-protected investments like TIPS, precious metals, and essential natural resources, and they should ignore the standard advice to “stay the course” in the throes of the next correction. For more details, please see Baby Boomer Investing in the Perilous Decade of the 2020s.

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