Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

There is no shortage of skepticism out there when it comes to the validity of China's official economic numbers, which are widely believed to be "massaged" at best or "cooked" at worst.  

The headlines run the gamut from the blunt -- "The truth about China's manipulated economic numbers" and "Nearly all U.S. economists don’t trust China’s GDP numbers" --  to the more inquiring and open-minded: "Can we trust China's economic data?" (Spoiler alert: No!)

And yet the Chinese stock market has seemingly become one of the most important economic data points when it comes to pricing assets in the U.S. and other developed nations where the economic data is more reliable (or so we hope). On Monday, the Shanghai Composite Index plunged 6.9 percent, triggering in part a 1.5 percent drop in the S&P 500. The amount of market value wiped out, however, was more similar: $590 billion in China and $514 billion in the U.S. 

While the U.S. market is still more tightly correlated to gauges such as the Stoxx Europe 600 Index or even Brazil's Bovespa, the link between Shanghai and Wall Street has grown...

Moving Together
The U.S. and China stock markets have become more closely correlated.
Source: Bloomberg data
Note: A correlation coefficient of 1 means prices are moving together in lockstep.

... as the market capitalization of the nation's equities swelled, reaching about 40 percent the size of U.S. stocks at their peak last summer. (Just for the sake of watercooler conversation: At more than $10 trillion last June, China's stock market was bigger than the U.S. market when it was finding a bottom in 2009.)

Catching Up
China's market has grown quickly from about 15 percent of the size of U.S. stocks to 30 percent.
Source: Bloomberg

What these charts show is that the huge rally in Chinese stocks did little to puff up U.S. equities in the first half of last year. The Shanghai Composite was up as much as 60 percent year-to-date as of June 12, 2015, while the S&P 500 was more or less flat during the same period. The correlation between the two started to pick up as China's equity market crashed and a devaluation of the yuan added focus on the prospects for the nation's economy, which seemed to be darkening by the day.

There are obviously some valid reasons for U.S. investors to worry about China's equity markets losing more than $5 trillion, which is what happened between June and August. As the nation attempts a delicate shift from a manufacturing economy to a consumer-based one, that's less paper wealth that theoretically could be spent on iPhones, Pizza Hut or "Star Wars" tickets. 

Still, it doesn't seem as if those paper riches were ever taken seriously to begin with in the U.S. stock market, which stayed relatively flat while Chinese equities ballooned last year. Perhaps that skepticism was the correct approach to a market where, as Bloomberg economist Tom Orlik wrote last year, more than two-thirds of new investors stopped going to school by about 15. 

It would be easy to conclude that the New Year's plunge in Chinese shares was a vote of no confidence in the nation's economy and that the contagion could reach U.S. stocks. But that would ignore all the fun-house mirrors through which investors have to view China's stock market. The potential expiration of a ban on share sales by large investors and a new circuit breaker that halts trading if the market's losses reach 7 percent might have been as much, if not more, to blame. Conversely, reports of liquidity injections, share purchases by state funds and an extension of the ban on sales by large investors seem to be what caused the market to stabilize on Tuesday.
In other words, as a "signal" of where China's economy is headed, there's reason to be just as skeptical of the stock market as every other data point.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at

To contact the editor responsible for this story:
Daniel Niemi at