Ray Dalio's argument on China's market movements
A lot of people think that the direction of a stock market is indicative of the direction of an economy. That is because a) the prices of stocks normally reflect the conditions of the companies, and the mix of stocks reflects the economy; and b) changes in stock prices have a wealth effect that affects economic activity. As we will show in this Observations, that is much less true for China than for other countries. That’s because 1) the liberalization of the financial system and all that is going on is not connected to the growth rate and normal economic linkages, and 2) the complexion of stocks is not representative of the economy. As a result, China can have a bull market or a bear market at the same time it has the opposite behavior in its economy. So don’t bet on those linkages.
In the process of developing China’s equity market, policy makers are moving to broaden institutional participation, both by opening up their markets to foreign participation and also strengthening domestic institutional savings pools. But we are still early in the process and, at this stage, institutional participation by both foreign and domestic institutions is still limited.
And while China has been making reforms in order to open up its domestic markets to foreign institutional investors, it still has a long way to go.The Chinese stock market appears to be in a perilous situation, but Ray Dalio holds that its linkage to the actual economy is limited. Simply put, the role of the country’s equity market in the economy is still low, as evidenced by a number of measures.
We are just at the beginning of the process of opening up Chinese capital markets to the world, and global investors’ positions are still relatively modest in the context of overall global equity portfolios, especially for A-Share positions that have had most volatile market action.