Volatility Returns to China

After a period of relative stability, Chinese equity markets have seen a pickup in volatility again this past week. We've blogged previously about some of the unprecedented actions that China took in order to bring price stability back to its equity markets, but those efforts may not have been enough. The primary concern for China remains the same -- individual retail investors make up the majority of the money currently invested in China's markets. These are the same middle class individuals that the Chinese government is counting on to keep the economy growing, and anything that damages their wealth could lead to a broader slowdown in the country as a whole. The Chinese growth rate (already a suspect figure) is currently trending downward anyway, leading to concerns about the ramifications of a slowdown in China globally.

We noted before that the specific structure of Chinese markets mean that foreign investors have little to no exposure to the actual share declines being experienced there now, but that doesn't mean they won't be impacted in other ways. The slowdown and concerns in China have already directly lead to declining prices in many major commodities such as nickel and aluminum, with oil hitting $48 a barrel after Monday's slide. This, in and of itself, has filtered out into manufacturing expectations; Markit's manufacturing output sub-index hit a 16 month low in the most recent survey. Furthermore, the currencies of many emerging market countries that are major exporters of raw materials are also down sharply, sparking concern about their ability to maintain growth expectations if export purchases are dropping off.

A slowdown in China will directly impact U.S. companies as well. Since earnings season began in June, nearly half of the 186 companies that have reported so far have mentioned 'China' in their discussions. Both the Dow Jones and the S&P 500 were down on Monday in response to the big fall in China, though they have since rebounded over the course of the week. China's rise in importance to the global economy means that the problems in their equity markets could easily spill out into many seemingly unrelated markets.