ipoqueue.jpgAnyone who still sees China on the margins of the world economy would have had a rude awakening this week.

On Tuesday, mainland Chinese stocks crashed 9% and global stock
markets tumbled in sympathy following the Chinese drop. The reason?
Chinese investors feared that the authorities were planning a crackdown
to cool the market's exuberance — the Shanghai A index rose 168% in
2006 — and weak US economic data triggered a sharp rise in risk
aversion for western investors.

Interestingly, some of the sharpest falls were for US luxury goods
makers like Coach and Tiffany, which fell more than 5% on fears of a
slowdown in Chinese demand for their products.

A day later, however, China's stock exchanges had clawed back some
of the previous day's losses and the price of over 150 smaller stocks
increased by 10% — the maximum single-day increase allowed for
China-listed stocks.

Wall Street took its cue and at mid-day Wednesday the indices had regained some of their losses.

So, are the troubles over? BusinessWeek quotes Standard & Poors' chief technical strategist who calls the drop a much-needed correction
in an overbought market. China's stock exchanges are unlikely to
rebound to their previous sky-high levels but the China sell-off will
not hurt western markets for long.

The storm may have passed but the takeaway from this bout of
turbulence is that what happens in China now effects companies and
industries in the west to a much greater extent than many investors
might suspect.

That is particularly the case in the finance sector, where, thanks
to recent liberalisation, China has emerged as a big new growth story
for foreign firms.

As their sharp price declines yesterday revealed, the fortunes of
many western investment banks are now tightly coupled to China, both as
an investment theme and as source of revenue — witness the large
amount of fees western banks have raised from China's big IPOs, such as
that of ICBC (pictured).

China's bond market has doubled to $1 trillion since 2003 and is now roughly the size of Canada's, according to Marketwatch.

In 2000, China did not have a derivatives exchange. But just five
years on, the Dalian Commodity Exchange had grown to be the 10th
biggest in the world and bigger than the more mature Philadelphia Stock
Exchange, New York Mercantile Exchange and Taiwan Futures Exchange.

Similarly, in retail and corporate banking, many big-name western
banks are desperately trying to get a foothold in the fast-growing
China market.

Standard Chartered, the Asia-focused bank, was one of the biggest
casualties of Tuesday's sell-off, despite reporting its 2006 financial
results with profits ahead of expectations.

Peter Sands, the bank's chief executive, shrugged off
the market turmoil, saying the bank would continue to invest heavily in
China, where it opened its first branch in Shanghai in 1858. He clearly
believes the growth story is intact: “Over the last year we doubled our
revenue and tripled our profits in China. “

The bank plans to almost double its branch network in the PRC,
bringing the total number to 40 by the end of this year. It also plans
to incorporate its business in China, which will allow it to offer
yuan-denominated products for the first time.

But the London-listed bank has no plans to list on a mainland
exchange and, given the fact that its results announcement coincided
with the Chinese markets' biggest single-day fall in a decade, one can
understand their caution.

Like S&P, we have long believed China's investment bubble was about to burst and we warned readers about it as recently as last week.

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