MONDAY AUGUST 31, 2009

China Syndrome

The U.S. equity markets are weak today, largely in sympathy with the Chinese markets. The Shanghai Composite Index dropped 6.7% last night, making its decline for August nearly 22%! Of course, this follows a 103% rally off the lows the index set in November.


I think it is a little silly to be comparing the Chinese stock market with the U.S. market. The Chinese market is closed to foreign investment. Therefore, it lacks the liquidity of most markets and is suspect to highly volatile movements like last night’s.

 

However, I do think there is a message in today’s trading. The stated “cause” of the trade-off was a forecast of a contraction of bank lending. Chinese officials voiced concern over “overcapacity” in certain industries, namely steel and cement. State owned industries in China have long been beneficiaries of dubious lending policies.  Today, the simple threat of monetary and fiscal tightening in China sparked a sell-off. Sooner or later, the U.S. will need to tighten its policies. Will our economy and markets react in the same way as China? It speaks to the need for an “exit strategy” that does not seem to be available at the moment.  

POSTED AT 1899-12-30 14:17:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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The opinions expressed here do not represent the views of Alliance Financial Corporation and Alliance Bank, N.A. This communication is not an offer or solicitation for the purchase or sale of any security, is for general informational purposes only and does not provide personalized investment advice. When making personal investment decisions you should consult your investment adviser or rely on your own research. Copyright 2008.