Global panic arising in China

U.S. stock markets are probably not at risk from a global panic arising in China. This is not so much because U.S. stock valuations are based on things such as price-earnings ratios, sober estimates of future earnings, and the excellence of management, but because a bubble in China is pretty much contained to China. Yes, there is foreign participation, but selling here to make up for losses there is likely to be small potatoes, if only because hardly any Chinese are able to invest outside of China.

Besides, Western professionals know full well that Chinese stock prices are divorced from reality. We have to assume those professionals prudently allocate less than they might given the size of the Chinese economy. Also, the supply situation is just plain weird, with the government owning most companies and able to add to or withdraw supply arbitrarily. That has to make Western professional managers warier than they are in a truly free market.

It’s an industry joke that the word “should” should always be put in quotation marks when used in finance and economics. To say that some event should occur to achieve fairness is to dream of a world that does not exist, and never did.