The first such Wall Street-inspired delusion is that the collapsing Shanghai stock market will have no effect on the underlying Chinese economy. But even though China’s 260 million trading accounts may be a relatively small percentage of the country’s population, it’s also the richest and most productive portion, which also happens to be equal to the entire U.S. population in 1993. And Chinese GDP growth accounts for a third of total global growth. So we can already find the manifestation of slowing Chinese growth in the nascent fall in equity prices.
For example, the profit of China’s industrial firms dropped 0.3 percent in June from a year earlier, reversing a 0.6-percent rise in May and 2.6-percent gain in April. For the first six months of 2015, industrial profits were 0.7 percent lower than a year earlier.
In June, China’s producer price index fell 4.8 percent on an annual basis, its 39th straight month of decline. In fact, the economy is headed for its poorest overall performance in a quarter of a century.
The second fallacy is that Wall Street believes in the TV commercial that claims what happens in Las Vegas stays in Vegas. Or, in this case, what happens in the Chinese economy stays in China.