July 10, 2008
The Decoupling Myth

It has become fashionable for commentators to sound like they know what they are talking about by saying that the economy of China and the U.S. are going to "decouple." They ramble on about China developing its own consumer demand and not needing the U.S. market for their exports. Even if the U.S. economy goes into serious recession, they say, China – and other fast-developing nations – will continue to prosper decoupled from U.S. dominance.

The data, however, tell a different story. Since November 2007, the iShares FTSE/Xinhua China 25 Index (NYSE: FXI) measuring the 25 biggest Chinese companies has matched the movement of the S&P 500 with eerie similarity. The Chinese majors (their 'red chip' stocks, if you will) have, not surprisingly, been more volatile, their highs higher and their lows lower; however, the chart above shows how China’s industry has moved in a tightly synchronized pattern with an ETF that has two times leverage to the S&P 500 (the ProShares Ultra S&P500; NYSE.SSO).

In other words, the Chinese economy as measured by its biggest companies has moved in tandem with U.S. economy and its blue chip stalwarts. The only difference is that China’s ups and downs have been more extreme.

This is why we choose to remain focused on facts, instead of listening to pundits. As Bud Conrad says, data trumps blather.

 

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