Here’s a fascinating little detail for all of those who insist on pointing to China as the cause of the meltdown earlier this week.

Consider this factoid: The combined value of China’s Shanghai and Shenzhen stock markets — the total market capitalization — was $400 billion at the end of 2005; Over the next 18 months, it nearly tripled, with especially strong gains over the last six months. After this week’s 8.8% plunge, it is a mere $1.4 trillion dollars.

To put that into some context, the New York Stock Exchange (NYSE) has a global capitalization of ~$26 trillion. The Nasdaq is worth another $17 trillion dollars.

Bottom line? By my back of the envelope calculations,
our correction of 3.5% wiped out an estimated  trillion dollars in
combined NYSE/Nasdaq 100 value — more than two thirds of the entire capitalization
of both of China’s exchanged combined.

Hence, why I doubt that China (alone) is responsible for what happened here . . .

~~~

UPDATE:   March 1, 2007 8:55 am

The "Bloomberg machine" (as one of my early mentors called it) shows the NYSE is $22.3 trillion cap, the Nasdaq comp at $4.19 trillion cap. Add in the Amex and figure the net total cap in the US is between $27 and 28 trillion dollars

Category: Data Analysis, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “China’s Market Cap? Don’t Ask!”

  1. Clark Kent says:

    This correction was due, and has brought the sentiment squarely back into the bulls wheel house! It was caused by (the spark) China’s 9% plunge, Elmer Greenspan’s sloppy (misquoted) remark, and prior weakness in India….and yes complacency from all the “record number of days without a X% correction”. Fear (and respect) is good, and is back.

    Complaceny, cockiness, and a sense of “entitlement” is now firmly in the Ursine camp…Record TRIN, 99% down volume, record short interest, (multi day) high put call, all should give the bulls some fresh wind at their backs.

  2. A Rahall says:

    Barry

    I think you might want to check your Nasdaq 100 capitalisation. My trustee Bloomberg machine makes the Nasdaq 100 at $2.13 trillion and the S&P500 at $13 trillion. So the Shanghai market is of the same order of magnitude as the Nasdaq.

    However, I dont think we can blame the falls on the Chinese. I realise all (most) things are made in CHina, but this wasnt.

  3. I pulled that off of the Nasdaq site — but I will double check it on Bloomberg

  4. Bill says:

    Jim Bianco notes that the ‘news’ that purportedly produced the 9% collapse in China on Tuesday, appeared on Sunday. So we had another case of ‘delayed reaction’ to negative news.

    Bloomberg: “The State Council, China’s highest ruling body, has approved a special task force to clamp down on illegal share offerings and other banned activities in the market, the government said. The group
    will provide advice on regulations and policy explanations of the securities market, according to a statement published [Sunday] Feb. 25 on the central government’s Web site.

    The government must pay attention to “bubbles” in its stock market before they get out of hand, Cheng Siwei, vice chairman of the Nation’s People Congress, wrote in a commentary published Feb. 6 in the Chinese-language Financial News.”

    Jim Bianco: “So, the rules that rocked Chinese stocks, and eventually the world, were published Sunday.

    Chinese stocks rallied Monday and then plunged 9% on Tuesday. Is anyone pay attention? Further, the vice chairman of the Nation’s People Congress warned these rules were coming on February 6. Again, is
    anyone paying attention?”

  5. Strasser says:

    Well Barry, we are not concerned about these declines in the market for I heard Big Ben say he was “closely monitoring” the financial situation, and several days ago Ken Tower stated on Bloomberg that there would be “no 10% correction”. Feel better?

  6. wally says:

    Yeah, but you are trying to do it by numbers; the drop, however, was about psychology.

  7. pjfny says:

    Barry, doug kass just mentioned your china cap story on cnbc………btw, has anybody heard about hedge fund stop losses and riskaversion as most likely motivation for selling.

  8. Tom C. says:

    Corporate earnings have peaked for the cycle. The revaluation process is happening now. The market correction is normal and will probably be overdone to the downside before it finds it’s footing. Trading this market will be a profitable exercise. It’s not the end of the world.

  9. pjfny says:

    This mkt is being priced for a goldilocks correction with lots of bottom pickers,buying “cheap” stocks on sale after a 4-10pct correction……what happens when the mkt realizes that mkt is not priced for recession, and it “has gone down too far to take you loss”?….panic selling?

  10. Ollie says:

    “…goldilocks correction…”
    That’s beautiful, it made me smile, thanks. As for panic selling, well, you do get lucky every once in a while. Markets seem to be behaving like pilotless drones.

  11. OldVet says:

    There was some reversal of the carry trade, with Yen and Swiss Franc rising while Brazilian Riyal, Icelandic Krona, and Turkish Lira all fell sharply.

    I can’t spot the doo-doo, nor the paw marks along the trail, but I see a chunk taken out of the butt of a financial tourist. Tourist may slap on a bandaid and carry on, but I know there’s a bear in the woods. I’m not buying any pablum served by Bernanke, or Hubbard, or Manikinwits or anybody else right now.

  12. GRL says:

    Once again, this post proves nothing. As we all know, prices are set at the margin, so the fact China’s market cap is of a certain size while ours is of a different much bigger size doesn’t mean jack.

    I ran across this post over on the Stratfor discussion forum dedicated to this subject, from someone named “pjfkharding,” which I will quote in full:

    According to senior Chinese bankers:

    1 – The psychological benchmark of 3000 points was reached on monday, tuesday’s sell off was mostly caused by the large institutional investors, including both foreign and chinese investors cashing in on these gains, these investors started buying back in on wednesday at the lower prices they somewhat deliberately created. This was possibly a pre-planned manipulation (by investors) for when the markets hit the 3000 point mark.

    2 – A rumour – only a rumour – (late monday / early tuesday) that the CSRC head was to be replaced, the sell-off was a market-response against this rumour of government policy.

    3 – Stratfor’s reason given in their report on the issue. THe Task force…

    4 – The Capital gains tax issue. This was only a suggestion by some (one?) policy makers. At the moment China’s tax system is not at all unified. Different tax systems operate for earned Income, Interest income, capital gains income etc and it IS in need of reform.

    Overall, the medium term outlook for the stock markets is still strong. Predicted falls in metals / oil etc leave little alternative to stock markets for investors.

    This doesn’t explain the transmission mechanism of how events in China spread around the world (or not), but it would suggest that “senior Chinese bankers” are trying very hard to backpedal, perhaps because they believe that what they did had a much greater, worldwide impact than they expected.

    Don’t get me wrong: show me some direct evidence of an actual cause and effect relationship between some other event and the 416 point drop, and I’ll stop trying to defend the indefensible. But post hoc ergo proctor hoc and the other arguments I’ve seen so far don’t cut it.

  13. Lauriston says:

    Barry

    The size of China market should not even enter the debate. What happens there is more important in terms of consumption of raw materials (commodities) and so on i.e. their economy. Of course it is perception that is changing via rumors and the usual fear and greed that drives the markets. And also remember market caps of stocks or exchanges is only what people are willing to pay for, and that can change for the weirdest of reasons like bird flu, Iran, etc. that we cannot quantify the way you have done for China markets. Heck, even Thailand can cause huge problems for global markets and it is smaller still.

  14. Estragon says:

    If we want to talk about relative sizes and elephants in the room, shouldn’t we be talking about interest rate, fx, and credit derivatives?

  15. BDG123 says:

    It’s ridiculous to blame this on China. BUT, I haven’t seen anyone blame this on China. Yet, one should not discount the impact on both the U.S. and it’s global trading partners on macro issues. Should the U.S. experience a significant slow down, I am extremely confident, China’s health will absolutely negatively and seriously be impacted. And, in turn, that will absolutely and negatively impact the U.S. economy.

  16. Rich Lather says:

    Fear following the sunrise is nothing new. What is strange is the sudden drop after the dow operators switched servers. This is the issue that has many scratching their heads.

    It seems to me to be a classic characteristic of a denial of service attack against their primary server timed to attack on a high-volume trading day.

  17. Saviano says:

    You don’t want to say, that every single day we create or desroy about a trillion dollars wealth as we fluctuate with the normal -say- 1% (USA, Europe, etc.)? Market reactions have their own patterns…

  18. DavidB says:

    With the way everything is so leveraged up these days it wouldn’t surprise me that $100 million worth of movement found a way to destroy a couple trillion $ worth of wealth in these markets

  19. JuanBobsDad says:

    Last May we went through a big dive also. The only reasonable explanation, IMO, was that the BoJapan sopped up some liquidity from the yen-carry trade. On 26 Feb the Yen/$ dropped from about 120.50 to about 117.50 where it is today. The echoes around the world markets would fit with the same idea.

  20. Loren says:

    Interesting article on “China’s Engineered Drop”
    http://www.investorsinsight.com/otb_va_print.aspx?EditionID=479

  21. Tom C. says:

    What is occuring now has as much in common with the Naz in 2000 as it has with utilities trading at 40x earnings in 1929. The current s&p pe is what, 19-20x trailing? Bring them down to 18x forward and I’ll be happy to buy it from you. The Yen carry bs will dry up and all the morons running their funds on ‘cheap’ foreign rates will go away and leave some pretty good companies for sale at what may be fairly cheap prices. Another 500 points or so to the downside will get the fed thinking about lowering. Buying in anticipation will probably be the right thing to do.This is not a stock market bubble, just a momentarily overpriced market. What has more to do with causing the inevitable correction to occur at this moment? China or the nonsense coming out of the new Congress and the mouths of the presidential candidates?

  22. drbrightside says:

    Yes, but what if 50% of a stock valuation is 90% mental behavioral tug of war between greed and fear. Thus the China meltdown lit the match which started the fire.

  23. drjones says:

    The global equity market meltdown has nothing to do with valuation. It was caused by massive unwinding of yen-funded carry trades, which began on February 21, 2007. This was the date when Bank of Japan hiked their interest rate to 0.5%.

    The market capitalization of China is just 32% of its GDP. Compared to the market cap to GDP ratios of other countries, this figure is relatively low. Warren Buffet had said in context of US markets that the market cap to GDP ratio “is probably the best single measure of where valuations stand at any given moment.