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The first trading day of 2016 brought all of us back to reality. The broader markets started trading in the New Year down about 2%.

It all started overnight in China, where the country's equity markets, the CSI 300 and Shanghai Composite, finished down 7.02% and 6.86%, respectively. The rout started after the PMI showed contraction, falling to 48.2, which was the tenth consecutive month of such declines. Is this new News? No. Should this news shock the markets in the U.S.? It shouldn't be. A couple of things to explore let's go them.

The China Growth Story and its economy is in a transition. The Chinese model was based on rapid growth fueled by State Run Enterprises and cheap labor from rural China. A surfeit of investment opportunities stoked the growth. But dwindling investment opportunities, declining returns on investments, stagnant incomes and a high savings rate burst the bubble of the Chinese growth story. The slowdown began around 2010. According to the World Bank the Chinese GDP was 10.6% in 2010, 9.5% in 2011, 7.8% in 2012, 7.7% in 2013 and 7.3% in 2014; and the Chinese government is targeting 7% for 2015. Lower seems to be the trend. The accuracy of these numbers can be doubted; but the price of commodities such as iron ore, copper and oil, all key ingredients to construction and manufacturing, confirm that lower is the trend.

Terrified of a recession, the Chinese rulers propped up the economy through pumping credit into the economy and propping up stock prices. The Chinese stock market has never been free and open. First, access to the market is limited. For example, it was not until November of 2014 that China allowed foreign investors, through the Shanghai-Hong Kong Connect, to trade on the Shanghai Stock Exchange. Moreover, investors have access to shares of only a limited number of companies and their investments are routed through a broker in Hong Kong to purchase shares in Shanghai. Second, the government controlled the market through a series of steps: restrictions placed on selling by large shareholders; orders to state run institutions to purchase shares; suspension of IPO's and halting trading of certain stocks.

The actual size of the Chinese stock market is tiny when compared to the U.S. The Shanghai and Shenzhen market cap are about $4 trillion and $2 trillion as of January 31, 2015. The NYSE and NASDAQ come in around $20 trillion and $7 trillion during the same period. That is a total of market capitalization in the U.S. of $27 trillion vs. China's $6 trillion.

The U.S. stock market is the most open and free flowing source of liquidity in the world. The U.S.'s equity market valuation is 6.5-times greater than that of China's. Yet a rout in the Chinese market spills over into the U.S. markets. It is irrational. China is slowing; it has been for years. Its economy needs restructuring. This is not new.

Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.