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Neal Kimberley

"China's markets are still pretty much separated from world markets," US Treasury Secretary Jack Lew said on July 8, arguing turbulence in Chinese financial markets was unlikely to spill over elsewhere.
Really? The fact is China is hardwired into the global economy.
Hong Kong investors understand this better than most, seeing the city's market buffeted recently by capital flows through the Shanghai-Hong Kong Stock Connect.
Nor could anyone describe the 18.6 trillion yuan (HK$23.5 trillion) of lost market capitalisation incurred between June 12 and July 3 on the Shanghai and Shenzhen exchanges as trifling.
As for the potential implications of Chinese equity market volatility, and of Beijing's subsequent policy responses, the impact will be felt worldwide in various ways, including in trade.
Chinese imports fell last month for the eighth consecutive month, albeit at a slower pace, the government said last week.
Meanwhile, car sales slipped 3.4 per cent, the first monthly fall in two years, according to the China Association of Automobile Manufacturers.
Luxury car dealers are cutting prices in an effort to shift their products, and that will ultimately mean trimmed profit margins for the world's carmakers.
BMW was cutting its China sales growth expectations for this year even before the stock market volatility. China, with 22 per cent of BMW's total vehicle sales, was its largest market last year.
The stakes are high for the German manufacturer and, indeed, for many others too.
US carmaker General Motors derived 38 per cent of its first-quarter pre-tax income from its ventures in China.
But there are much broader issues arising from China's market vicissitudes and official responses.
Beijing's moves to stabilise its equity market were politically necessary but international investors are likely to conclude that measures such as the enforced suspension of trading in many stocks represent a step backwards in the liberalisation of the country's capital markets.
To the extent that the easing of monetary policy on June 27 was also aimed at calming stock market volatility, there are also implications for others, especially given that the US Federal Reserve is still edging towards an interest rate increase this year.
US monetary policy has been effectively tightened compared to Beijing's cutting of its benchmark rate.
And if part of Beijing's strategy to stabilise its stock market means drawing on some of its mountain of foreign reserves, the bulk of which are held in US treasuries, the need to sell some of that paper could, at the margin, weigh on their price and thus push up their market yields.
Notably, China's foreign exchange reserves fell by US$40 billion in the second quarter, central bank data showed, making a cumulative drop of US$300 billion at the end of last month from a year earlier.
Paradoxically, if Beijing's efforts at calming its stock market appear successful, that could remove one international concern holding the Fed back from finally increasing interest rates based on its domestic view.
Such an increase would then mean actual US monetary policy would be tightening while China's was easing and the euro zone and Japan both continuing to retain ultra-accommodative monetary policy settings.
That should leave the US dollar as "the best looking horse in the global glue factory" to paraphrase a memorable quote from former Dallas Fed chief Richard Fisher.
A stronger greenback would clearly make global servicing of dollar-denominated debt more expensive in local terms, at a time when the International Monetary Fund is already marking down its expectations for world economic growth this year.
But there is a final reason why what happens in Chinese markets matters and that is the possibility that while Beijing might be able to stop the equity market rot in the short term, only to see the sell-off eventually restart.
If Beijing's policy measures do not prove successful, "the same loss of confidence in the omnipotence of the Chinese authorities will surely swirl westwards", Societe Generale's Albert Edwards wrote on July 10. "Do not be surprised when the S&P collapses in exactly the same way as the Shanghai stock exchange."
Undoubtedly, Lew would take issue with such an assertion, but his own conclusion, that what happens in China's markets will not mean turbulence elsewhere, is itself untenable.
It is a matter of fact. China's market moves matter.


US Treasury chief Lew's China market view askew

US Treasury Secretary Jack Lew's conclusion that China's markets will not cause turbulence elsewhere is untenable. Photo: Reuters

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Economy

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Successful or not, Beijing's policy measures to stabilise its share market will be felt worldwide in various ways, contrary to US official's belief


.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Successful or not, Beijing's policy measures to stabilise its share market will be felt worldwide in various ways, contrary to US official's belief

Successful or not, Beijing's policy measures to stabilise its share market will be felt worldwide in various ways, contrary to US official's belief