Recent events in Turkey have reminded investors of the contagion risk coming to the U.S. stock market from abroad.
However, the biggest potential contagion is 14 times bigger than Turkey and deserves investors’ attention. Let us explore with the help of two charts.
Please click here for the annotated chart of Xtrackers Harvest CSI 300 China A ETF ASHR. That’s an exchange traded fund for mainland China.
Please click here for the annotated chart of Chinese currency renminbi CNHUSD.
Please note the following:
• Gross domestic product (GDP) of China is more than 14 times bigger than that of Turkey. Any potential contagion emanating from China will have a significant impact on the U. S. stock market because of the size of the Chinese economy.
• Please note from the chart that in dollar terms, the mainland Chinese market has dropped 31% from its peak.
• Please note from the chart that the Chinese currency, renminbi, is approaching the key level of 7 renminbi to 1 dollar. If that level is decisively broken, the U.S. stock market may come under pressure.
• While the Chinese stock market and currency have been falling, the Dow Jones Industrial Average DJIA the S&P 500 SPX — as represented by ETF SPY and Nasdaq ETF QQQ have ignored the developments in China. The reason is that investors in the U.S. are focused on popular stocks such as Apple AAPL, Amazon AMZN and Facebook FB; those stocks have been steadily rising, propping up the indexes. This is not likely to last if the Chinese stock market and currency keep dropping.
• The damage in the Mainland China ETF and iShares China Large-Cap ETF FXI is nowhere near the iShares MSCI Turkey ETF’s TUR. China is a completely different situation from Turkey. In Turkey there is a significant current account deficit and there are large borrowings in dollars. In China there is a current account surplus and massive dollar reserves.
What to do now
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