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April 21, 2009

"Dump the Dow. Track Shanghai Composite"

In his column for the Economic Times, Ruchir Sharma points out how the Chinese market is emerging as a leading indicator for markets and economies across the world.
Over the past couple of years, the Chinese stock market has been acting as the harbinger of global trends. After bubbling up to record high valuations in 2007, it was the first stock market to peak in early October of that year...And, probably most significantly, it was ahead of other stock markets to form a bottom late last year in an almost immediate reaction to the Chinese authorities announcing massive stimulus packages. While investors across the world remained sceptical of whether the Chinese measures would work, the Shanghai stock market continued to rally sharply over the past few months.

...The mention of decoupling conjures up images of the China and the US running off in different directions. That is not what’s going to happen. Decoupling is an evolutionary concept and the Chinese economy will take time to transition from an export-oriented growth model to a more consumer-oriented one. It’s also unlikely that China’s growth trajectory will return to the 10%-plus rate it sustained from 2003 to 2007. Such a pace of growth was partly rooted in the global credit bubble of that era. The Chinese economy’s growth potential is probably closer to 7-8%.

At $3.5 trillion in size, China’s economy may not be large enough to independently chart a course for the world economy but it now has the critical mass and the ability to at least save the world from falling into an abyss. So when trying to figure out which way the global economy and markets are going to zig and zag, it makes sense to follow the movements of Chinese A share market as closely as those of the S&P500.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in