What the Shanghai Composite Today Says About China Tomorrow

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What the Shanghai Composite Today Says About China TomorrowThe Shanghai Composite is made up of several hundred Chinese publicly traded stocks, but is dominated by 50 which include China's largest banks, its largest utilities, transportation, and unity companies. It's as close to a proxy for the performance of shares of public firms in the People's Republic as investors can find.

Oddly, though China is supposed to be a more robust economy than the U.S., the Shanghai Composite is up only 5% in the last year, compared to a rise of 25% by the S&P 500. China's GDP has been growing at a rate of over 9% in the last year. First quarter U.S. GDP grew only 1.8%.

There is a belief among many Wall Street traders that the movements of stock indexes are based to a large extent on what traders think will happen to earnings and the economy over the next six months. That theory has been called into question by the behavior of U.S. markets of late: The U.S. appears to be headed toward another economic slowdown, but the S&P is still trending upward. Yes, the growth rate of the index since early March has slowed from the rate of the previous year, but it's still growing.

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A number of China IPOs are listed on U.S. exchanges. Some small ones have recently fallen because of concerns about financial and audit practices in the People's Republic. But, the more likely purchases for U.S. investors are China's big cap stocks like huge oil company CNOOC (CEO) or China's largest wireless provider China Mobile (CHL). Each is listed on the Hong Kong exchange, but neither can dodge the general declining trend in Chinese shares. And, as a matter of fact, China Mobile's share are down slightly in the last year.

So, what about investment in China? There are a number of proxies for trading the Chinese market beyond direct investment in individual stocks. The most popular is the iShares/Xinhua FTSE China 25 Index (FXI). It has traded up 15% in the last year, a growth rate which still lags the S&P 500.

There's more to consider than China's white-hot GDP growth before investing in its largest companies or ETFs. There are concerns about real estate and commodities bubbles. Labor costs are on the rise and the middle class is agitating for better pay. Oil, agricultural goods, and metals prices have spiraled up. The Purchasing Managers Index for China, which measures manufacturing activity, has shown only very modest growth. And China expects a power shortage this summer because the rising cost of coal has cut the profit margins of electric utilities to the bone.

The perception that China is a good place to put investment dollar has weakened recently, which may be why the Shanghai Composite has faltered.


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