If the predictions of a Chinese slowdown are undisputed, those of an analogous trend in the stock markets – even in absolute values – create more questions than answers. Despite the fact that a connection between the real economy – measured in GDP growth – and the stock market index has never been proven, their correlation is becoming an axiom even among experts. A more or less soft landing of the Chinese economy has been tied to a general pessimism about the stock market, and this attitude is based on skepticism that the economy will be able not only to resume its usual pace but also that new liquidity will be put into the market. In fact, fears of an abrupt slowdown in Chinese growth are almost unanimously shared. The most recent predictions by the IMF and World Bank have corrected their previous estimates downwards, putting growth of the GDP at around 8% in 2012, and only slightly higher in 2013. This performance is clearly a far cry from what China is accustomed to. Analysis has converged on an imbalance in the components of the Chinese economy as the cause of the slowdown. Investments cannot continue when consumption does not grow as much as expected. Trade is affected, with a drop in both exports and imports, and the latest numbers have only stopped the trend. Whether or not the stock market is affected by the trend will depend on the confidence of investors; maybe the outlook can induce some optimism. If the situation is so difficult for China, if the country is so ill equipped to manage dwindling growth, the urgency for a new stimulus package may prevail. With the probability of reforms spurred by the upcoming summit, destinations for the stimulus package ought to be diversified from the customary targets of manufacturing and real estate. The stock market seems ready to forget the downturn; the pessimistic expectations may have already been absorbed. The Shanghai Composite Index is at 64% below its 2007 peak. Its price-earning ratio is 11.5, very close to the lower limit reached during the 2008 financial crisis (11.1) and clearly very far from its historical high of 44.3 in 2007. Similar numbers can be found when analyzing the China Security Index, which includes 300 of the best A shares of the Shanghai and Shenzen stock exchanges. There is therefore the distinct possibility that expectations begin to turn towards optimism and bring about a reversal of the downward trend. New sectors could become involved, in particular those tied to the predicted reforms. That does not mean investing in state owned companies, but in segments with margins for improvement that are linked to the establishment of a less regulated society. Private insurance companies could meet the needs of the people and approach the numbers of other industrialized nations. Reform of the welfare state, both in health and pensions, will be inevitable. Even IT companies could benefit from the new availability of investment, by branching out beyond the usual national circuits that besieged by excessive attention the security of the country. Although uncertainty may dominate, it should not always be identified with pessimism. In a country like China, everything will depend on the political climate. Just as it has happened other times in recent history, it is politics itself that delegates the preservation of its role. Giving breath to the economy, and restarting the stock markets as a consequence, could bring stability and prosperity and would cement the leadership in its position of power.
