Developed markets feel China impact

Financial Times:

When the US sneezes, the rest of the world catches a cold – or so the old saying goes.

But in recent days it has been the sickly Chinese stock market that has been blamed for infecting markets in other parts of the world.

Take Wednesday – the Shanghai Composite index fell 4.3 per cent. Other Asian markets dropped sharply and bourses in Europe initially followed suit before recovering later.

David Morrison, market strategist at GFT, says: “We have put so much emphasis on Chinese growth and this bizarre notion that this will pull the rest of the world up with it, that when cracks begin to show traders start to worry.

“The increasing wariness over the accuracy of Chinese data, and concerns that stock and property bubbles have resulted from government stimulus ‘misallocation’, have got us all turning to the Shanghai Composite each morning in a way we would never have done even a month ago.”

Fraser Howie, the Singapore-based author of Privatising China who closely follows the Shanghai markets, adds: “China’s markets have become much more influential and correlated with other markets, not just in Asia but all over the world.

“This is because China is the only big economy in the world that is growing strongly. It is contributing more to world gross domestic product than before, so its markets have become more important to investors.”

This is a change because for many years the performance of Chinese and western equities was not correlated. There were good reasons for this, including the relative isolation of the Chinese market. It is very hard, for example, for western investors to buy Chinese A shares, as opposed to H shares which are traded in Hong Kong and which can be bought by foreigners.

Analysts say there have been a number of occasions in the past two years when falls in Chinese equities have sent tremors through other markets. One was on February 26 2007, when the Chinese market fell almost 9 per cent. But the opposite is also true. Last November Chinese markets began to recover following the announcement of the country’s massive $568bn stimulus programme, which presaged the recovery in western markets.

Posted via email from Jim Nichols