A slide in mainland Chinese equity markets in August, weaker economic data and the country’s devaluation of its renminbi currency against the dollar have ignited fears this will hurt the global economy. Global commodity prices have fallen, keeping benchmarks such as the Baltic Dry Index at multi-year lows. The MSCI China Index of equities (in dollars) is down 5.9 per cent since the start of 2015, erasing gains made prior to August.

JP Morgan Private Bank’s Michel Perera, who is chief investment strategist for EMEA, and Rajesh Tanna, portfolio manager, sought to calculate the extent of any knock-on effects from China.

“These events come at a critical time for Europe. A combination of easier central bank monetary policies, a weaker euro, lower oil prices and stronger growth in the US and UK have all contributed to lifting the region’s growth rate to around 1.5 per cent to 2 per cent in 2015, from around 1 per cent in 2014, and China’s slowing growth could impact these figures as we move into 2016,” said Tanna.

Perera said: “At JP Morgan Private Bank we eliminated our direct exposure to Asia emerging markets in our discretionary portfolios over the summer because we believed the outlook had deteriorated following the mismanagement of China’s local equity market. We re-invested the proceeds into a combination of developed market equities (notably European) and cash, with a view to fully reinvesting the proceeds once the market turmoil shows signs of abating. As there are no major imbalances, we do not believe the world economy is about to fall into a recession and remain overweight equities and long risk.”

China

“When China unexpectedly announced it was abandoning the strong link between the renminbi and the dollar on 10 August, this move triggered a rapid 3 per cent CNY depreciation before the People’s Bank of China intervened to stabilise the exchange rate. At the same time, August 2015 saw the first US equity market correction since 2011 with the S&P 500 Index losing 11 per cent between 17 August and 25 August,” Perera said.

“The drop was amplified in the euro area where the MSCI EMU Index lost 20 per cent in euro terms, although just 11 per cent in US dollar terms. We believe this correction was caused by moderately disappointing US second-quarter earnings figures, as well as uncertainty about the strength of the world economy and the impact of China’s slowdown,” he said.

China’s contribution to world gross domestic product hasn’t fallen because the size of its economy has more than doubled in less than 10 years, Perera said, seeking to put concerns about a China slowdown into context. “As the world’s second-largest economy (at current exchange rates), China represented 13 per cent of world GDP in 2014 from 6 per cent in 2007,” he said.

“A slower, less resource-intensive China can be seen as a positive for the world economy, even if global growth slows modestly and commodity prices continue to fall. In the latter part of the 2000s, China’s rapid expansion stretched the supply of raw materials across the commodity spectrum. The slowdown and rebalancing of China’s growth model gives commodity supply chains space to re-adjust,” he said.

Impact on Europe

“Europe can withstand a gradual, orderly slowdown in China, helped by supportive ECB  policies and solid growth in the US and UK - which are two of the region’s key trading partners, comprising 25 per cent of total exports,” Perera continued.

“German exports to the US and UK have taken off, while those to the BRIC countries (Brazil, Russia, India and China) have flat-lined, and exports to China as a proportion of overall GDP remains a modest 1 per cent for the euro area. These figures suggest that, if euro area exports to China were to drop 20 per cent (which is unlikely for we believe volumes will remain stable), the region’s GDP would fall by only 0.2 per cent. Some countries would be more affected than others, such as Germany,” he added.