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Volatility in stock market shouldn't hurt China, US economy

By Nariman Benravesh (China Daily)
Updated: 2007-03-09 15:03

China's growth is more important to the global economy than the Chinese stock market.

While the big drop in Shanghai's market was one of the triggers of the recent turmoil in equity markets, evidence of a "rice bowl crash" is very limited.

To begin with, stock market capitalization in the Chinese mainland is small relative to the United States, Europe and Japan. Furthermore, the United States and other major markets are not overvalued. There is little doubt that US stock prices did rise too much in the past few months, given the outlook for sluggish growth in the US economy and single-digit increases in earnings.

However, price/earnings ratios are now below where they were in the mid-1990s. This means that while US financial markets will likely be less calm than in the past few months, stock prices are more likely to move sideways than experience a long contraction.

Consequently, further drops in the Shanghai market will probably have a smaller impact on the US market than occurred on February 27.

Part of the contagion effect from the Chinese stock market to the rest of the world had to do with concerns about the potential impact on the country's growth and, therefore, the impact on export earnings of the United States, European and Japanese companies.

While China only accounts for about 6 percent of the global economy, compared with 30 percent for the United States, the Chinese economy has generated about 15 percent of global growth in the last five years and accounts for an even higher percentage of the profits of many multinational corporations.

This global dependence on China's economy is set to grow in the coming decades. Thus, it was no surprise that in the wake of the stock market turmoil, companies with large export exposure to China were hurt the most.

In the final analysis, the sell-off in Shanghai was more of a wake-up call to investors, who had become too complacent about risk than the beginning of some global financial crisis.

While the US economy will struggle in the coming months, the risk of a recession is still low notwithstanding Greenspan's comments.

One of the larger concerns of investors is the rather shaky outlook for the US economy. Recent data have been more negative than positive, suggesting that growth this year will be slower than previously expected.

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