360 Degrees on China's Selloff

When Does China Matter?
By David Merkel
5/30/2007 10:11 AM EDT

Back in February/March, I counseled readers not to panic. Those calls, along with my concerns over subprime and homebuilders have largely (but not entirely) been validated.

So Shanghai was down 6.5%? Looking at all of my systemic risk proxies -- swap spreads, corporate spreads, option volatility, emerging market equities and bonds, the yen, Swiss franc, etc., all indicate lack of concern. But is this lack of concern warranted?

The stamp tax has been adjusted in the past in China, and it has not had as large of an impact. Further, the way that China affects the global economy is through:

1. Purchase of raw materials from abroad.
2. Deployment of cheap labor into industry, which produces relatively cheap goods for export.
3. Purchase of foreign assets, particularly U.S. bonds, to sop up excess U.S. dollar/euro claims from running a trade surplus.

None of this is affected by the change in the stamp tax, or even changed willingness to take financial risk in China. There are other things worth worrying about, and if I get a moment later today, I'll drag one of them out. But for now, keep doing what you are doing; I don't see any reason to change from your ordinary risk posture.