What Do You Call a Thing Like China?

Chinese Investment

On July 27th, the Chinese stock market took a huge plunge, dropping more than 8 percent. The following day, stocks fell another 1.6 percent. While many experts are quick to point out that another drop is unlikely to happen, there are still some that are worried about the effects these plunges will have on the Chinese stock market, and what this will mean for U.S. investors?

“Normally we would say that the Chinese stock market is not that connected to its real economy, as firms don’t use it to raise that much money, and it’s a small percentage of household wealth,” said David Dollar, senior fellow at the Brookings Institution’s Thornton China Center. “By coming in with all these measures, the central authorities on the one hand seemed a little panicky…and the really worry is that this undermines Chinese people’s confidence in the real economy and the government’s ability to make policy.”

If the Chinese economy, and even the Chinese government, is in a situation where they are facing doubt, does that make the Chinese market too risky for U.S. investors?

Only time will tell if this is true or not. However, from where we sit today, investing in China might still be a good idea—we see examples of these types of investments paying off regularly.

Take the investments of KKR for example. According to George R. Roberts, Co-Chairman and Co-CEO of KKR, shared values and trust are important to fostering successful business relationships. These relationships take time to develop, which means a certain degree of faith and trust must be used from time to time.

KKR has seen success using this strategy multiple times, and are clearly committed to their strategy. For example, they invested in First Data, a payments processing company, despite a sizeable debt load. This strategy focuses on long-term capital appreciation either through strategic minority positions or through controlling the ownership of the companies.

Ultimately, the repercussions of July 27th’s Chinese stock market plunge will depend on whether or not the real Chinese economy, beyond the stock market, takes any damage. If this occurs, and doubt crops up about Chinese policy and stability, then the situation might escalate and become more complicated. But, for now, it appears that maintaining trust in the larger system will allow things to return to normal very soon.

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About DevonJ140
I am currently an Accounting Director living in New York City. I love reading and learning more about business, finance, tech, and current events.

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