Saturday, February 02, 2008

Brief Take: China, Volatility, and the Winter Storm

I created this chart in Bloomberg to illustrate a couple of things about China's equity market. Here we see the past year of trading in the S&P 500 Index (green line; SPY) plotted on a ration chart against the CSI 300 Index (blue line; a cap-weighted index of leading stocks in Shanghai and Shenzhen). If we thought volatility was high in the U.S., see how China rose threefold from July to October and now has lost a third of its value during its 2008 decline.

Note the recent decoupling of the U.S. and China markets. While SPY has bounced nicely off its recent lows, we are making new 2008 lows in China. That, no doubt, reflects concerns regarding the impact of the recent fierce snowstorms in southern China. The impact of the storms is so profound that there are social and political ramifications, not just economic ones. Interestingly, articles emphasize that these impacts will be short-term and limited. Investors do not seem quite so convinced.

At any rate, the shortages of coal and food will exacerbate inflation in China. This comes at a time when the government is already fighting inflation by curbing the growth of credit. This is a disaster much larger than Katrina in the U.S., and the damage from that latter storm has yet to be undone. As in the New Orleans disaster, responses to the event were belated, as its severity only became evident over time. The slide show that accompanies this Forbes story illustrates the human side of this tragedy, but also clearly illustrates the frailty of an economy that, for all its volatile growth, remains one that is emerging.