— Deng Xiaoping
By Catherine Austin Fitts
If you want to contemplate the financial equivalent of a moonshot, the rise in China ETF’s last week would suffice.
Normally, anything that goes up that fast should take a breather and come back to ground. However, this weekend Beijing said that Chinese investors can open up to 20 accounts in China’s A-Share markets. So prices were up again today.
The size of global equity markets has grown from $11 trillion in 1990 to $70 trillion today. With stock ownership in America dropping from a high of 65% of households to 45%, the world is waiting to see if a rising middle class in China and India will begin to shift participation. It will make a difference to the build-out of infrastructure on the silk road if retail investors are eager to participate.
China’s markets were in a long-term downward trend until late in 2014. We started the year with a US S&P ETF trading at 18X earnings and the Chinese ETFs trading at 9X. That is quite a gap — one that is now beginning to close as Chinese ETFs move up to 11X at the end of last week.
A strong dollar was supposed to be bad news for emerging market stocks. With the yuan pegged to the US currency, China’s exports are under pressure. In addition, Chinese companies have borrowed in dollars, taking on much more debt. Local governments are highly leveraged. So is the real estate sector. Chinese growth come at the price of a significant increase in debt levels. Paying back debt denominated in dollars as exports slow could produce quite a squeeze. If the Fed raises interest rates, that squeeze could accelerate.
However, while China’s economy is slowing, its growth rate is still 3 times that of the US. As one Fed governor said recently regarding the US economy, “Growth has disappointed to the downside.”
The US equity markets have raced ahead for the last three years. The big question is when and how the European and Asian markets will close the gap.