Sunday, January 15, 2012

Today's Major Market Move: ChiNext Price Index (Chinese Equity Index) Declines 26% in Past Six Weeks

Chinese equities continue to show significant weakness and since December 1, 2011, the worst performing equity index on the planet (of the ones we track) has been the ChiNext Price Index. It is down 26% in the past month and a half, and down 45% from its 2011 highs.

Click here to go to the live chart.
The ChiNext Price Index (which we have mentioned previously on 12/3/2011 and on 6/25/2011) is comprised of high growth/high risk companies so it is not surprising to see it near the top of the list when equities are performing well and near the bottom when they aren't. But as far as Chinese equities in general go, it is not just the ChiNext index that is faring badly. Of the 10 Chinese equity indexes that we track, 9 of them are down by more than 20% since the beginning of 2011.

Click here to go to the live chart.

Let's also take a look at equity performance compared to GDP growth.

Click here to go to the live chart.

That chart shows us something quite remarkable. While GDP has grown over 150% since 2007, the Shanghai  SE Composite Index, the benchmark equity index which is the best representation for overall equity performance in China, is negative. One scenario is that Chinese equities were already significantly overvalued in 2007 and are simply returning to a more fair valuation. Another possibility is that we will see huge gains in the Chinese stock market as stocks catch back up with GDP growth. Yet another is that we will see Chinese GDP growth significantly underperform future estimates.

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