Why China’s crashing share market doesn’t matter

Credit: Motley Fool Ltd. All rights reserved.

Twice this week China’s regulators have suspended trading on the Shanghai share market after the index plunged more than 7%, and trading is volatile again today.

Yesterday, China’s market was only open for 14 minutes before it fell the maximum it is allowed in any one trading session and erased almost all its gains over the past few months.

That has caused ructions in markets across the globe, including our own S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) which has lost 5.8% in the past five business days.

There’s more than one reason for the fall, including Chinese bureaucrats devaluing their currency to stimulate economic growth – and scaring investors worried about the world’s growth engine slowing down.

Rules put in place to halt trading also appear to be making the selloffs worse, with investors selling out before the trading halt comes into effect.

Then Beijing stopped large corporates from selling their shares for six months – that was six months ago. Now investors fear that once that ended, everybody would try and sell their big blocks of stocks all at once, so they wanted to get in first and sold their stocks.

It’s a bit like the fable of the African village that was plagued with cobras so the leaders offered a bounty on cobras. Unfortunately, some enterprising people decided that they would breed cobras and take advantage of the bounty. Once the leaders found out, they cancelled the bounty, but that meant the cobras were now worthless and therefore set free, and the village ended up with a worse cobra problem.

No wonder the Chinese government has announced that it will remove those circuit breakers that halt trading.

As big as the problem is for the Chinese authorities, it’s much less of a problem for Australian investors. The Chinese sharemarket is treated more like a casino than other markets dominated as it is by inexperienced retail investors, and represents only a small portion of the economy compared to Western exchanges where a vast majority of the largest corporations are listed.

That means rises and falls on the Chinese share market bear little relation to the growth in the Chinese economy.

Sure, it means our market will have some indigestion as traders following the Chinese market jump in and out of the market. (Who’d want to be a day trader?)

Foolish takeaway

For, Foolish investors, the volatility means very little and the timeless, proven strategy of buying shares in quality companies at cheap prices, investing regularly and holding for the long-term applies.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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