The Shanghai Composite Stock Index has plunged 38 percent since June 12, and that has many investors in Chinese stocks heading for the hills.
But billionaire investor Wilbur Ross isn't too worried. "I just think they’re going through a little tricky period," he told Forbes.
"Let’s say that we’re right, and China is only growing at 4 or 5 percent. For a big economy, that’s a lot." U.S. GDP increased 3.7 percent annualized in the second quarter.
China's economy officially expanded 7 percent in the second quarter, but private economists agree with Ross that the actual total is much lower.
"We got a little spoiled when they used to grow at 10 percent [until 2012]," he said. "That was never going to be sustainable forever. But unless the unemployment rate gets too bad, I don’t see China exploding. I don’t think a big depression is coming."
China's official unemployment rate is 4 percent, but some economists put the true figure at 10 percent.
Meanwhile, top strategists and money managers expect the stock drop to continue, pushing the Shanghai Composite down to about 2,700 according to Barron's. That would be a 16 percent fall from Friday's close of 3,200.
Price-earnings ratios don't look pretty for Chinese stocks, notes Barron's writer Daniel Shane. The Shanghai index carries a P-E of 15. While that represents a steep decline from June's high of about 22, it's 50 percent higher than a year ago, when it totaled 10.
The 2,700 level for the Shanghai Composite would represent a return to 10 for the P-E ratio.
Some say the index could well drop further than that level. “I’m sure there were plenty of analysts a week ago telling you the floor was 3,500,” Michael Parker, a Sanford Bernstein strategist, told Barron's.
Fundamentals aren't so hot for Chinese stocks. In addition to slowing economic growth, the government devalued the yuan last month. Investors are losing faith in the government's economic policies.
"Views about China’s economic prospects appear to be shifting from serious concern to near panic," Eswar Prasad, a Cornell University economist who formerly headed the IMF's China division, told The Wall Street Journal.
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