[AndrewWoo]

China has been at the forefront of global recovery hopes. It is hardly surprising that fears of faltering Chinese growth and policy tightening should dent global risk sentiment. The main concerns are of an immediate sequential deceleration in bank loan growth (and its impact on liquidity in the A-share market) and the associated change in macro policy direction to induce a sharp slowdown in lending and thus investment growth.

The market concerns are understandable. The reduction that we have seen in China's net exports recently is a clear sign that China's domestic demand has outpaced external demand significantly. Analysts believe China will likely continue to help global demand by running a much smaller trade deficit (in real terms) next year. So any slight weakness in the China story will have important ramifications for the rest of the world and understandably raise concerns, as we have seen in recent weeks.

The Chinese A-shares market has borne the brunt of the global de-risking so far, down around 15% since the beginning of August. This is partly a function of ‘gravity’—a sharper pullback for markets that have run up the most. A-shares as of the recent peak were well ahead of the other Asian markets including H-shares, but with the correction, now looks more in-line. So far, this seems to be a more localized issue--the A-share correction has been more severe than other China related assets. AUD, copper and China-sensitive US equities for example have seen much milder pullbacks. This could continue to remain a more localized phenomenon. But it is a fine line as mentioned, given the importance of China in driving global demand today.