By Pam Martens and Russ Martens: January 8, 2016
Yesterday, Wharton Finance Professor Jeremy Siegel appeared on CNBC to make a prediction that the S&P 500 index would experience a 10 percent upside by the end of this year. You might want to evaluate that prediction against what Professor Siegel also believes to be the U.S. situation with China. In answer to a question as to why the economic situation in China won’t weigh on the U.S., Siegel said: “We export very little to China” (see second video at this link). That statement, in fact, is false. According to detailed data from the U.S. Census Bureau, China is our third largest source of exports, at $106.1 billion through November – behind only Canada and Mexico.
Ruptures in the stock market in China have now cratered U.S. stocks twice in the past six months. Thanks to spillover from China, the first four trading sessions of the New Year for the Dow Jones Industrial Average and the S&P 500 Index have the distinction of being the worst in U.S. history. That’s nothing to sneeze at.
Unfortunately for U.S. stock investors, there are far more linkages between China and the U.S. than Professor Siegel or mainstream media want to delve into. For starters, China has a far greater presence in U.S. stock markets than is generally recognized. As we reported in July of last year, the New York Stock Exchange shut down trading for three hours and 40 minutes as a result of a reported computer “glitch” during a period of ruptures in the Chinese stock market. We wrote at the time:
“Unknown to most Americans, some of those shuttered stocks on the New York Stock Exchange were Chinese stocks and among the largest capitalized companies in the world. More than 100 Chinese companies trade on U.S. stock exchanges as American Depository Receipts (ADRs) and almost 200 Chinese company ADRs trade over-the-counter in the U.S. (Individual shares are referred to as ADS, American Depository Shares.) Last year, Thomson Reuters estimated the market value of Chinese companies listed on just the New York Stock Exchange and Nasdaq Stock Market at more than $1.4 trillion.
“With the Chinese stock market rupturing over the past week and trading in more than a thousand stocks suspended in China, the spillover has hit the U.S. market hard.”
Two large Chinese companies that trade in the U.S. as ADRs are China Mobile and China Life Insurance. Their ADRs have lost 46 percent and 45 percent, respectively, since April of last year.
Yesterday, the Dow Jones Industrial Average closed down 2.32 percent but mega Wall Street banks delivered a much worse showing for themselves. JPMorgan Chase closed down 4.04 percent; Bank of American finished 3.61 percent lower; and Citibank lost a whopping 5.11 percent. Citigroup has now lost 12.5 percent of its market value in just the past four trading sessions as stock market convulsions in China spill over into U.S. trading.
Exposure to China’s problems at the behemoth Wall Street banks is multi-faceted. These banks provide margin loans (prime brokerage services) to hedge funds with billions of dollars in exposure to global markets. Wall Street banks are also on the hook for loans to developing countries and corporations in those countries whose U.S. Dollar-denominated debt owed to the banks is expanding exponentially as the U.S. Dollar grows in value against their local currency. China’s continued devaluation of its own currency, to keep its exports competitive against those of developing countries, is exasperating this problem, leading to what looks like currency wars to economic observers.
Another concern is that there may be Wall Street bank exposure that is completely off the radar screen. As we previously reported:
“In February, Rolling Stone’s Spencer Woodman reported that a number of big Wall Street names like JPMorgan, Citigroup, UBS, and Merrill Lynch (the investment bank and stock brokerage arm of Bank of America) were underwriting bonds for real estate firms in China that were involved in forced evictions and relocations of Chinese residents in order to build large development projects. Woodman references a 2012 Amnesty International report which found that some forced evictions ‘resulted in deaths, beatings, harassment and imprisonment of residents who have been forced from their homes across the country in both rural and urban areas.’ ”
Another question is just how dependent the U.S. housing market has become on China. If things get bad enough in China, the government could decide to restrict capital from leaving the country.
According to the National Association of Realtors, Chinese buyers spent $28.6 billion in a 12-month period ending in March of last year in the U.S. housing market. That made China the largest foreign buyer for the first time, eclipsing Canada which invested just $11.2 billion. The majority of the purchases were single family homes and condos with concentrations in cities such as New York, San Francisco, Los Angeles, and Miami.
Then there is the worry of exactly how confident we should be in the audited financial statements of China-based companies that are trading in our markets. As we reported in detail on January 27, 2014, there are lots of reasons to worry about this issue.