Why Chinese Stocks are in a Bear Market and it Doesn’t Matter

July 02, 2015
By Bryce Coward, CFA in Markets

Chinese stocks are down a cool 30% from their high less than one month ago, but it matters little to most investors. Despite the much touted opening moves by China to allow foreign participation in their stock markets, the reality is that most foreign investors still don’t have full or even partial access to mainland listed equities. The quota system and new Shanghai-Hong Kong Connect are insufficient to meet foreign investors need for ease and liquidity both into and out of the domestic Chinese stock market. MSCI’s recent decision to not include mainland Chinese listed stocks into their featured EM index supports this assertion. In fact, the rally in Chinese equities since the middle of 2014 was almost entirely driven by domestic speculation and the expansion of margin debt. Thus the current bear market is almost certainly affecting local Chinese investors primarily. Due to capital controls, the Chinese markets have usually marched to their own drum and we see little difference in today’s environment.

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