Blog Post

The dragon sneezes, Europe catches a cold

European stock prices, financial contagion and the trade exposure to China. How the turmoil in China’s stock market is affecting European stock markets through Europe's trade exposure to China

By: and Date: August 26, 2015 Topic: Finance & Financial Regulation

Should we be worried about the turmoil in China’s stock market, and the spill-overs to markets in other countries? Two competing hypotheses currently exist:

The first is that Chinese stocks had grown at unsustainable rates leading up to the crash, and this is simply a market correction back towards fundamentals, and not a warning of deeper weakness in the Chinese economy.

This view would align with that of the ECB’s vice-president Vitor Constâncio:

“Indications are that … the (Chinese) economy is not decelerating so much to justify the rout in the stock market. (…) The problems in China are not affecting … the concerns of German firms,”

Stock market declines around the world would in this view only represent some short-term financial contagion without a connection to real economic activity.

The second hypothesis is that the collapsing stock prices are linked to a slowdown in economic activity in China. Such a slowdown will then be passed on through trade linkages to China’s trading partners.

We want to investigate whether the stock market falls in Europe are primarily a financial contagion problem or whether they are linked to trade exposure to China. We look at the decline since the start of August until now, compared to the extent to which the respective OECD economy is linked to China, measured in gross exports to China as a share of GDP.

Contrary to the first hypothesis that this episode is just a matter of turbulence in financial markets, we can see that in Europe those countries with stronger trade connections to China have generally suffered bigger losses in their stock markets. We take this as an indication that there is a disruption in the real economy in China, leading to less demand for European exports to China that is passed on to European stock markets through trade channels.

For example, if we look at Germany, we can see that the DAX has fallen by around 12% (second highest in the sample), and also has the highest exports to China as a share of GDP at 2.66%.

Overall, we would warn European policy makers not to take the Chinese crisis lightly. The health of the Chinese economy is of essence to the global economy and there are reasons to believe that this could turn out to be a more fundamental cooling of China than previously thought.

Figure 1: Decline in European Stock Markets and Trade Exposure to China

China_Stocks

Source: UN COMTRADE, 2013. GDP from OECD. Stock indices not available for Portugal and Slovakia.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic

Blog Post

No Financial Meltdown

Intel suffered only minimal pain in the stock market following revelations about the ‘Meltdown’ hardware vulnerability. But if the market won’t compel providers to ensure the safety of their hardware, what will?

By: Alexander Roth and Georg Zachmann Topic: Innovation & Competition Policy Date: January 15, 2018
Read article More by this author

Opinion

China Fails to Woo U.S. With Financial Sector Opening

China's recent announcement of reforming its financial market has received little enthusiasm from the U.S. despite its potential benefits. The lack of a clear agenda regarding its economic rival has pushed the Trump administration to minor any significant progress of China's reform, and to maintain focus on strategic issues.

By: Alicia García-Herrero Topic: Finance & Financial Regulation, Global Economics & Governance Date: January 5, 2018
Read article

Opinion

Chinese banks’ improved asset quality cannot hide other phantoms

The recent improvement in asset quality cannot mask other growing concerns in China’s banking sector. Beyond liquidity concerns, other structural issues such as low profitability and insufficient generation of organic capital, are emerging.

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation, Global Economics & Governance Date: December 20, 2017
Read article More on this topic

Blog Post

Brexit, phase two (and beyond): The future of the EU-UK relationship

Whether it looks more like ‘CETA-plus’ or ‘EEA-minus’, the trade deal that emerges from phase two of the Brexit negotiations should not be the limit of ambition for future partnership between the EU and the UK

By: Maria Demertzis and André Sapir Topic: European Macroeconomics & Governance Date: December 13, 2017
Read article More on this topic

Blog Post

Promoting intra-regional trade in the south of the Mediterranean

Regional integration is still a sure way for economies in development to achieve economic growth on the global market. The south of the Mediterranean has still a low level of intra-regional trade integration, dominated by some overlapping trade agreements and political instability. The EU has the opportunity to play a decisive role, promoting and coordinating the process.

By: Filippo Biondi and Maria Demertzis Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More by this author

Blog Post

The European Union with the Community of Latin America and the Caribbean: where do we stand?

Latin American and Caribbean countries have deep historical, political, cultural, and economic ties with Europe, and cooperation between the two regions has been intensifying recently. Here we report some of the main trends in trade, foreign direct investment, and agreements between the European Union and The Community of Latin American and Caribbean States, the European Union’s official counterpart in the bi-regional strategic partnership that commenced in 1999.

By: Francesco Chiacchio Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 5, 2017
Read article Download PDF More on this topic

External Publication

Central Asia—twenty-five years after the breakup of the USSR

Central Asia consists of five culturally and ethnically diverse countries that have followed different paths to political and economic transformation in the past 25 years. The main policy challenge for the five Central Asian economies is to move away from commodity-based growth strategies to market-oriented diversification and adoption of a broad spectrum of economic, institutional and political reforms

By: Marek Dabrowski and Uuriintuya Batsaikhan Topic: Global Economics & Governance Date: November 14, 2017
Read about event More on this topic

Past Event

Past Event

A conversation on USA economic policy with Kevin Hassett

This is an invitation-only event for Bruegel's member and for a selected number of experts.

Speakers: Kevin Hassett Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 9, 2017
Read article More by this author

Blog Post

European worries about isolationist trends

Populist shocks in the UK and US threaten the multilateral order on which the EU depends. What lies behind these earthquakes, and what does it mean for Europe? Withdrawing from the world is no solution to geo-political upheavals, but Europe needs to reassess the future of globalisation.

By: Maria Demertzis Topic: European Macroeconomics & Governance, Global Economics & Governance Date: November 7, 2017
Read article More on this topic More by this author

Blog Post

Falling Pound might not bring UK trade balance boost

The Pound Sterling depreciated by 14% against a basket of world currencies in the four months after the referendum vote to leave the EU. A number of pundits claimed that this would improve the UK trade balance and boost the economy. But the data do not show any visible improvement in the trade balance to date. Could it be that currency depreciations have less impact on trade balances than before?

By: Nicholas Branigan Topic: European Macroeconomics & Governance Date: October 31, 2017
Read about event More on this topic

Past Event

Past Event

EU - CELAC Economic Forum - Channels for a joint future

On 11 October Bruegel together with GIGA and Real Instituto Elcano will organise a conference on relations between the EU and the Community of Latin American and Caribbean States.

Speakers: Paola Amadei, Angel Badillo, Paulo Carreño King, Linda Corugedo Steneberg, Gonzalo de Castro, Gonzalo Gutiérrez, Bert Hoffmann, Edita Hrdá, Ramón Jáuregui, Emilio Lamo de Espinosa, Eduardo Levy Yeyati, Gabriel Lopez, Enrique Medina Malo, Maryleana Méndez Jiménez, Luicy Pedroza, Mario Pezzini, Mario Soares, Everton Vargas, Dylan Vernon and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 11, 2017
Read article

Blog Post

India’s trade ties with the UK and EU

As EU and Indian leaders meet in Delhi, we look at the figures on trade. The UK’s place in the relationship warrants special attention. EU-India trade has more than tripled since 2000, but UK-India trade is largely static. The shift is especially noticeable for EU exports to India, where the UK share has dropped from 29% to 10%.

By: Maria Demertzis and Alexander Roth Topic: European Macroeconomics & Governance, Global Economics & Governance Date: October 6, 2017
Load more posts