Most people think the stock market predicts the state of the economy, as it usually does in this country.  Therefore, it is logical to assume the Chinese economy is tanking, just because their stock market is tanking.  Certainly, that economy is slowing down, but nobody is predicting a real economic recession with two quarters of negative GDP growth.  That economic slowdown is masking the real problem of the Chinese stock exchange.

In China, when the stock market falls 5%, “circuit breakers” automatically kick in, and the market simply closes down.  That began in December, in response to their market collapse last summer.  It was supposed to calm nervous investors but did the opposite.

Now, suppose you are a typical Chinese investor.  You know the economy is softening, and you know that your stock market took a terrifying fall last year.  Because you never know when you will need your money and because you never know if your stock market will be open for you to sell stocks, you just want out now.  When you try to sell, the market shuts down.

The problem is the 5%!  Change it to 20% (like the U.S.), and that problem goes away.  While they still need to control their currency (at a 5-year low) and to get their economy growing faster, they should fix this problem with their circuit breaker immediately.  Until then, investors worldwide will just  keep getting seasick.

I wonder if I should buy stock in Dramamine?