Shanghai Composite is Not a Main Driver

With China contributing mightily to the world economy, many investors are casting a watchful eye on the Shanghai Composite, the largest of the Chinese equity markets. It fell more nearly 22% in Aug, leaving it about 46.5% higher than the start of the year. There seems to be a tendency to exaggerate the significance for other markets.

We looked at correlations between the Chinese equity market and other markets. To disclose our methodology, we calculate the correlations based on percentage change rather than absolute levels on the understanding this is the more robust approach.

Over the two past years, the correlation between the euro-dollar exchange rate and the Shanghai Composite is 12%, same as the year to date. In the most recent 3 months the correlation has risen to just above 21%--~1 day a week. This this the highest correlation since Q2 07. The highest over the past decade was recorded in Aug 2005 with a correlation of about 40%.

The yen's correlation with the Chinese equity market is not statistically significant. Over the past two years, the correlation is about 4% and year to date it has fallen to a little more than 2%, but in the past three months has risen to about 5.5%.

What about the US stock market ? Over the past two years, the S&P 500 and the Shanghai Composite have a 4.5% correlation, while the year-to-date correlation is has doubled that to 9%. In the last three months it has doubled again to 18%.

Out of the range of currencies and commodities we looked at, which was by no means exhaustive as much as suggestive, copper looked the most interesting. The correlation between the front month copper futures contract and the Shanghai Composite over the past two years has been 16.5% and since the start of the year it has risen to 27.4% and in the past three months, it has risen to just above 30%.

Bottom line: Correlations between currencies, S&P 500 and copper prices and the Shanghai Composite have risen, for the most part the relationship is not that tight. It is not so much a question of decoupling as they do not appear to have been tightly linked in the first place. The dollar's movement against the euro and yen does not appear to be influenced very much by the Chinese stock market performance.
Shanghai Composite is Not a Main Driver Shanghai Composite is Not a Main Driver Reviewed by magonomics on September 01, 2009 Rating: 5
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