Forget your plans for a quiet, relaxing summer. The stock markets of the world's second largest economy are tumbling; and when Chinese equities turn bearish, it can be brutal. At one point during Hong Kong trading day on Wednesday, the Hang Seng Index fell close to 20% below its February peak.
. And it is more likely just a beginning, not the end of the process. It’s also becoming a major inflection point for global investors to evaluate Chinese and China-linked assets. As one recent analysis put it: “China doesn’t care how much money you lose.” Goldman Sachs and JPMorgan Chase will not be alone in turning cautious on Chinese stocks.
But it won’t just be a domestic Chinese event. What happens in China now has major ramifications far beyond its nearby Asian economies. In Europe, the export-driven economies of Germany, the Netherlands and Italy are the most sensitive to a changing China governance model and a weakening yuan to the euro. Latin America and Africa are also increasingly reliant on either Chinese direct investment and trade.
There is an increased risk of foreign capital flight if a developing nation’s currency suddenly weakens, potentially forcing its central bank to raise interest rates sharply. A concomitant stronger dollar exacerbates this as money around the world flies to the safety of the global reserve currency. Furthermore, because most commodities are priced in dollars, the cost of vital raw material imports just goes higher. It is already pushing emerging market credit spreads wider.
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