Chinese stocks: canary or elephant for world markets this year?

LONDON: Canary in the coal mine or elephant in the room? For investors, either idiom could apply to Chinese stocks in what is already shaping up to be a rocky ride for global markets this year. Pessimists would go for the canary metaphor: the New Year dive that began in Shanghai serves as an early warning of how local events can have repercussions across the world.

Optimists would see China as the elephant: impossible to ignore but whose market is so tightly-controlled and largely shut off to foreigners that it shouldn’t have such a major bearing on the global investment picture.

If market moves this week are any guide, the swings in Shanghai stocks will exert a major sway over world markets this year even though China’s equity weighting is relatively small in global terms. The fall in world stocks on Monday, the first trading session of 2016, marked the steepest opening day losses in years for many indexes. Topping the list of investors’ reasons to sell was the 7 percent plunge in Shanghai shares earlier that day; this prompted China’s first nationwide suspension of trading plus a rapid reaction by the central bank and stock regulator, hoping to restore calm.

Worries about how robust China’s financial markets are, the ability of authorities in Beijing to support them and the overall health of the economy are nothing new. They triggered a global market slump late last summer. However, the extent of Monday’s fall and the global fallout caught investors off guard.

“Markets tend to drop every time Beijing intervenes. Investors sense desperation,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago. Chinese stocks plunged 45 percent in the three months to August last year. That month the yuan currency underwent a mini devaluation and on Aug. 24 alone the Shanghai equity market tumbled 8.5 percent.

This particular fall caused tremors around the world. Wall Street chalked up its biggest loss in four years, with the Dow Jones down as much as 1,000 points at one stage that day. In the past year Shanghai’s benchmark composite index has fallen 5 percent or more in a day on 12 occasions.

The impact on Wall Street has been broadly negative, with the S&P 500 falling on nine of those days, including a 3.9 percent slide on Aug. 24. But the correlation hasn’t been uniform. Four of the S&P’s declines were of less than 0.5 percent, and on three days the index was unchanged or higher. For months, investors blamed Chinese markets and China-related factors for any imperfection in the world economy and markets.

These concerns gradually receded as the US Federal Reserve prepared for the historic interest rate increase that it finally delivered last month, and as a renewed fall in energy prices intensified the pressure on the European Central Bank to loosen its monetary policy further.

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