Drop in Shanghai Stock Market Over the Past Two Years: 20%
The Chinese government controls China's economy--or so it hopes--as it eases monetary policy to reverse a growth slowdown. Expansion of gross domestic product dropped from almost 12 percent in early 2010 to 8.9 percent in 2011's fourth quarter. No worries, say investors with faith in the government's ability to use its muscle to positive effect. Optimists note that China's leaders did just that during the worst of the global financial crisis in 2008-09, stimulating the economy to the tune of $585 billion. Relative to the size of its economy, that was more than twice the size of the U.S. government's 2009 stimulus.
Photograph by Zhejiang Daily/Imaginechina/Corbis
Why It Matters
Bears argue that a slowing domestic economy, as well as weak growth from China's trading partners, will be too much for government action to overcome. Skeptics such as Gary Shilling, who forecast the 2007 U.S. recession, see a "hard landing" for China. So too does hedge fund manager Jim Chanos, who argues that the 2008 stimulus simply amplified a national real estate bubble. Whether the Chinese government can prop up the economy, and whether European governments can contain the damage there, will determine whether China avoids the fate seen by these gloomy prognosticators.
Graphic by Charlos Gary/Bloomberg
What It Means for Your Portfolio
In 2009, China's economic-stimulus policies drove the Shanghai Stock Exchange Composite Index to a gain of more than 80 percent. The following year the government put on the brakes. Now its central bank is changing course yet again. Zhang Han, a strategist at Guotai Junan Securities, the only major brokerage house to foresee the two-year bear market in Chinese stocks, believes the shift bodes well for the stock market. "Liquidity will improve as a result of the government's easing policies," Zhang told Bloomberg News. The strategist expects the Shanghai Composite Index, down 20 percent over the past two years, to gain that back and more by the end of 2012.
Photograph by Li Yuze/Xinhua/ZUMAPRESS.com