Losses through the week in major indices around the world and indeed in emerging market countries in Asia, have chipped away yearly gains that most indices have chalked up this year.  China's Shanghai index however is up nearly 78% on the year.  How is it possible?

In a bit of an ironic twist, as it's actually China's much criticized capital controls.  Whether inadvertently or through a masterstroke of economic policy, the Shanghai market has remained relatively untouched by the sub-prime mess due to capital controls on the front end, limiting international investment in the stock market and on the back-end preventing outflow of billions of yuan invested in the Chinese market.
 

Typically when a crisis strikes similar to the current sub-prime fiasco or the Asian crisis in 1997-98 or even more frequently when the market is going through a period of doubt, emerging markets are the first to go because of the higher risk involved.  In this case however, moving large amounts of money outside of China just isn’t possible.  So while other indices like the Jakarta composite drop 6% in one day and are close to setting 6 month lows, the Shanghai index marches on.

China leaving the subprime mess unscathed will likely result in increased anti-China rhetoric from US presidential candidates as the Dow slips below 13,000 into pre-May 07 territory and more fingers are pointed at China using capital controls to the detriment of the US economy when in fact much of the US macroeconomic issues are tied to domestic US fundamentals.