Does China's stock market slide matter?

On Tuesday night the Shanghai B-Share index fell 10%. The A-Share market fell 7%. I don't suppose this came as much of a surprise to anyone except the hordes of novice retail investors in China. For some weeks now, most commentators, including several government officials, Asia's richest man, Li Ka-shing, and even Alan Greenspan, have been warning of a bubble. The question now is not will China fall further (it probably will), but does it matter if it does? To that, the answer is that if you look at it rationally, it probably shouldn't.

As Jonathan Allum of KBC, Belgium's largest financial institution, points out, the total market cap of the Chinese markets is smaller by $3bn than just a quarter of the S&P 500, and "even this overstates the true size of the tradable market since around 70% of it is held by the government". And despite all the stories of "stockmarket fever" (every single UK paper has reported this week the fact' that 300,000 trading accounts are opened every day in China this week), less than 10% of the population actually own shares. As is often the way in emerging economies, the stockmarket is not really much of a reflection of the economy as a whole and it is China's fast-growing economy, not its stockmarket, that is driving global growth and markets in much of the rest of the world.

Still, the fact that it shouldn't matter what is happening in a small and very overvalued market (average p/e 48 times) in which foreigners aren't much invested anyway, doesn't mean that it won't. There's not much value left in many markets (Japan and some of the eurozone aside) after the outperformance of the last few years, so, just as was the case when Chinese shares fell 9% on 27 February, sparking a global mini-crash, there are bound to be plenty of traders out there looking for an excuse to sell.

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