China Risks Spoiling Global Markets Party as Stocks Tumble Again

  • Shanghai Composite Index has tumbled 5% from recent high
  • Correlation between China, world equities is near zero

Trump Rally Shows Signs of Life

China’s volatile markets are flaring up just as all eyes are elsewhere.

While global risk appetite returned on Monday on the heels of France’s presidential election, shares in China bucked the trend, dropping the most in three months. The Shanghai Composite Index has lost almost 5 percent since its mid-April peak, worse than all other national benchmarks in the world.

The slump in Chinese stocks is deepening as authorities seek to reduce economic leverage and regulators intensify supervision on the country’s financial sector. While the selloff has been relatively contained, with European politics taking center stage instead, investors may be forced to take note if the losses continue, as predicted by analysts.

“We shouldn’t forget what happened two years ago,” said Mark Tinker, head of Axa Framlington Asia in Hong Kong, referring to 2015’s dramatic collapse in Shanghai share prices. “The hope is that this is all just a preemptive strike from the Chinese government to make sure markets don’t squeeze up too much. The risk of contagion is low as long as people don’t start confusing the stock market with the economy.”

While capital controls limit the global impact of moves in China’s $6.9 trillion stock market, A-share slumps can trigger concerns about the health of the world’s second-largest economy. The MSCI All-Country World Index’s biggest monthly declines in the past two years coincided with sell-offs in Shanghai, in August 2015 and January 2016.

The Shanghai Composite Index is virtually flat for the year, trailing the global benchmark -- which is up 6.2 percent -- by the most since 2014. Price moves for the China stocks gauge show no link to the rest of the world, with correlation ratios now near zero.

Investors are already punishing companies across the world that rely on China for their earnings. An index of firms in developed markets that get the most sales from the Asian nation, including Qualcomm Inc. and mining giants Rio Tinto Group and BHP Billiton Ltd., has lost 2.2 percent in April, on track for its biggest slide in 15 months.

New Risk

China’s authorities are taking advantage of an improving economy to reduce financial-system risk by tightening the screws on leverage, while the banking regulator said it will crackdown on irregularities in the financial sector. Global fund managers named Chinese credit tightening as a new risk in April, according to a Bank of America Corp. survey published last week.

Tighter policy is weighing on copper and iron ore prices, with China being the world’s biggest consumer of those base metals, and that bearish sentiment is spilling over to the stock market this month, according to Mayank Mishra, a strategist at Standard Chartered Bank in Singapore. He says the change in monetary conditions will increase volatility in the short term.

“When this push towards deleveraging started in China, we’ve been asking what the spillover effects can be,” Mishra said by phone from Singapore. “We’re seeing some of this happening across commodities and stocks in China, the question is whether it can spread further.”

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