Global Finance & Markets

Decoupling Happened: U.S. Stocks Soared, China's Shrugged


The idea that emerging markets could keep growing smartly despite the collapse of the U.S. was something romanced quite a bit in recent years. Decoupling, as it’s called, was at least numerically possible. After all, China, Brazil, India, and Russia—the planet’s four biggest emerging economies, which chipped in two-fifths of global economic growth in the year leading up to Wall Street’s 2008 collapse—stood out as the least dependent on exports to America. Upwards of 95 percent of China’s double-digit growth was attributable to domestic demand.

Turns out a decoupling did transpire in the five years since peak meltdown—only it’s the U.S. market that seems to be doing fine while China founders. It’s a divergence of fortunes few would have predicted.

The benchmark Standard & Poor’s 500-stock index has produced a total return of 207 percent to touch a record high in the five years since the market set a low unseen since the 1990s. Citigroup is clocking U.S. shares at “euphoric” territory. By comparison, the MSCI Emerging Markets Index has returned 125 percent.

China’s CSI 300 Index just hit its worst reading in five years, and Chinese stocks now change hands at their lowest projected price-earnings multiples in seven years. Over the weekend, official data out of Beijing revealed the biggest plunge in exports since 2009, jeopardizing the government’s targeted economic growth rate of 7.5 percent, which would be roughly in line with its showing in each of the last two years. Overseas shipments plunged 18.1 percent vs. analysts’ median view of a 7.5 percent increase.

There are new fears that private-sector credit quality could be deteriorating—whatever “private sector” means in the heavily state-planned economy. Last week, China had its first onshore bond default as Shanghai Chaori Solar Energy Science & Technology said it would not be paying interest on certain notes.

“Investors are pulling out of financial markets where there’s an economic slowdown and a lot of uncertainties,” Dave Lutz of Stifel Nicolaus told Bloomberg News. “The outflow of capital from China will not end until investors stop seeing all the headlines about China indicating the country’s growth is faltering.”

At a time when risk appetites run deep in Western junk and tech markets, China-centric exchange-traded funds are being hit with the biggest outflows in the world. Withdrawals from U.S.-based Chinese ETFs came in at $87.5 million on March 10, the most among 46 nations, bringing this year’s cumulative redemption to just over $380 million, according to data compiled by Bloomberg.

All of which has taken its toll on China’s fledgling equity culture. Its homeland indexes have to more than double merely to revisit 2007 levels, when gambling on tickers that closed with the lucky number 8 was all the rage.

Not that many Chinese much care. Now more of them plow cash in the money-market fund of e-commerce heavy Alibaba than have equity brokerage accounts.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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