China is recognized as a manufacturing powerhouse and a major buyer of commodities and fixed-income securities.
Last week’s correction in the Shanghai composite stock index showed that China has become a force to be reckoned with in the global equity market as well.
It also showed that U.S. financial markets are increasingly linked to the Chinese stock market – and prone to its downdrafts.
“What we saw on the market on Tuesday is recognition on the part of the rest of the world that China is a real player,” said Jim Reis, president of the World Trade Center in Denver. “What happens in China will have influence in the United States.”
Goldman Sachs predicts China will become the world’s largest economy by 2042.
Students in Colorado, from preschoolers at the Denver Academy to college students at the University of Colorado at Boulder, are studying Chinese in greater numbers to prepare for that day.
Even conservative investors and retirees who think living in Colorado should shield them from events in China can’t afford to remain indifferent, said Doug Allen, director of global business programs at the Daniels College of Business at the University of Denver.
“To a great extent, the entire health of the global economy is dependent on the Chinese economy,” he said.
Two years ago, the Chinese stock market was too small to sway global equity markets, but that was before a speculative run-up pushed Chinese stock values to $1.3 trillion, said Robert Bush, an economist with ERIC Forecasting Publications in Englewood.
“The insulation that once protected international exchanges from Chinese policies is gone, which makes the international system more vulnerable to Chinese crashes,” he said.
In a pattern not unlike the run-up in the Nasdaq composite in 1999, the Shanghai composite index returned more than 200 percent between July 15, 2005, and last week.
Prognosticators had warned that Chinese stocks were overpriced and due for a tumble. When the correction came, it took down the U.S. markets, which suffered their worst week in at least four years.
In all, last week, the Shanghai index fell 5.6 percent. The Dow Jones industrial average ended down 4.2 percent for the week, the Nasdaq composite dropped 5.8 percent, and the S&P 500 fell 4.4 percent.
Colorado stocks were not immune. The Bloomberg Colorado Index, a basket of 110 companies based in the state, shed 4.5 percent.
China’s importance to the state extends far beyond its stock investments.
Exports by Colorado companies to China, including Hong Kong, grew 42.9 percent to $800 million last year, making it the state’s third most important trading partner following Canada and Mexico.
Back in 2002, the exports the Chinese purchased from Colorado were about half that amount, Reis said. Chinese purchases are focused on technology, including quality-control equipment Chinese manufacturers need to remain competitive as they make more complicated goods.
China, however, exports far more goods to the U.S. than it imports – $287.7 billion versus $55.2 billion in 2006.
Central bankers in China reinvest many of the surplus dollars received into U.S. treasuries and bonds, keeping interest rates lower than they might otherwise be.
That has given U.S. consumers more disposable income and allowed homebuyers to buy more home for their income.
China has consumed increasingly larger amounts of natural resources, driving petroleum and metal prices higher.
Higher oil prices have kicked off a drilling boom in the Rocky Mountain region, boosting economies up and down the Western Slope.
An emerging middle class in China and India has lifted demand for gold, helping companies like Denver-based Newmont Mining.
Fears that China could face a slowdown lowered the price of gold, normally considered a hedge against falling stock markets, by 5 percent last week. Newmont alone lost $1.1 billion in market value since Tuesday’s decline in Shanghai.
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
