[achiever]

From early August peaks through last week’s bottom, Chinese A shares declined by nearly 20%. This move has certainly been dramatic, but how much have China-focused concerns impacted other asset markets?

A-Shares are a highly idiosyncratic market, so tracing out moves there to other assets, even equities, is a dicey proposition. And looking across global markets, US sectors and bits of the commodity complex, it is hard to see similarly large shifts, though they are modestly evident in some places.

Against the backdrop of a decline in A Shares and moderate re-rating lower of China risk elsewhere, it is worth remembering that the economic outlook in China is still quite robust.

The sector composition of the A-Shares market as represented by CSI 300 underscores its particular focus: it is nearly 1/5 banks, 1/10 oil and gas, and 1/10 insurance. Although this is a fairly large financials weight, HSI and HSCEI both have financials weights well in excess of 50%. Although critical in the current context, exposure to Chinese financials is not the same as exposure to Chinese economic pressures.

Indeed, historically, the A Share market is not particularly correlated with other equity markets due to capital controls which restricts foreign access to A shares and at the same time keeps domestic liquidity within China. Thus, the realized correlation of the A Shares (21-day) returns with other equity markets averages about 0.38. As a benchmark, the average realized correlation for the SPX with other equity markets is nearly 0.8, and other Chinese equity markets all fall in the 0.7 to 0.8 range too, so it is far more idiosyncratic then even other key China-domiciled equity markets like FXI, HSI, and the HSCEI.

The independence of the A-Shares market has been evident in the recent price action too. After bottoming in late 2008, ahead of most other equity markets, they rallied from the start of the year through early August by about 80%.

Turning to commodity markets, evidence of China jitters is hard to come by. Oil prices did decline about 6% in early August, but by the time A-Shares hit their bottom, oil had bounced back. On the metals side of the ledger copper climbed through much of August and, after a brief setback, reached new local highs even as A-shares were reaching lows. Elsewhere in the commodity complex, some prices have come under pressure; natural gas, wheat, and corn are all sharply lower. But the China connections are not as clear to us there, and we read the commodity market as broadly resilient to China jitters.

The unique makeup of A-shares, its relatively weak correlation to other markets, and its degree of recent underperformance relative to other equity markets, leads some to speculate that that dramatic A-shares move may likely be due in part to domestic capital market concerns, credit provision and equity flows there, as opposed to more globally troubling concerns over the economic outlook, strictly speaking.

There is some evidence of mild China-related underperformance in some global equity indices, and China worries have likely weighed (and continue to do so) on the materials and energy sectors the US market. But the A-Shares move has been more or less contained.

The pull from China has clearly already helped to spur exports growth and an industrial turn around in many parts of the world, underscoring the global dependence on China, particularly against a backdrop of still-weak developed market final demand. Continued strength in Chinese data and signs of additional improvement in the global industrial cycle may be enough to help shore up market sentiment and stabilize China risk as viewed from an asset perspective.

[cppene]

The fall in Chinese A shares proved to be one of the main talking points through August. While the index fell close to 7% on Monday, in Asian trading today, in was up about 0.6% today. The correction in the A share market has been driven by a step up in the pace of tightening by the Chinese authorities, with the recent moves lower in response to market rumblings about the size of loan growth in August amongst other things. The removal of policy accommodation - still via so called ‘back door’ measures – has come sooner and somewhat more forcefully than had anticipated. This has sparked questions over how strong Chinese growth will be going forward by market participants.

The fall in A shares through August did cause a wave of jitters across markets, particularly in Asia, however the effect proved short lived – not least because other equity markets have reached new highs for the year. Developments in the A share market were initially overlooked by the Chinese rates market, however since the middle of August 2-yr IRS have rallied by about 15bps, likewise on some concern over the Chinese outlook. Analysts do expect Chinese growth to be resilient even though momentum is likely to slow.