[ForexNews]

Recent developments suggest that international investors have been paying increasing attention to changes in China's equity prices. This is, in part, unsurprising given China's importance in the global economy. However, the global markets probably read too much into the volatility in China's equity market for implications about the global economy.

China is likely to become the second-largest economy in the world in 2010. At the margin, China is the most significant economy, being the largest contributor to global growth in recent years and having a pulling effect on the rest of the world that is now twice as large as that of the US.

The import composition suggests that Asia and global commodity exporters benefit the most from China's economic growth. Perhaps it is not by chance that the economies which rebounded earlier in the wake of the global financial crisis were either close to China geographically or were major commodity producers.

While China's stock market has grown to be the largest in Asia, its impact on global markets is limited by controls on cross-border portfolio flows. In addition, the developing stage gives rise to higher volatility in the Chinese market, reducing its value as a leading indicator for the global economy.

The recent correction in the Chinese equity market mainly reflects concerns about tighter liquidity conditions due to a slowdown in new loans. However, beyond that initial reaction, the markets seem to have accepted that credit growth in China remains accommodative to economic growth.