INVESTORS have long been wary of America’s sneezes, knowing they can give the world a cold. In Asia they now also fret about Chinese rhinitis, which is proving just as contagious. For financial epidemiologists, this is something of a puzzle. It is to be expected that germs can spread from China, Asia’s biggest economy, to others in the region. But it is surprising quite how infectious they are proving. Unlike America, enmeshed in global markets, China’s economy is in self-imposed quarantine, protected by capital controls that limit its interactions with others.

Yet China’s impact on Asian stockmarkets is now nearly as potent as America’s. Two recent papers, one from the IMF and one from the Bank for International Settlements (BIS), a forum for central banks, reveal the extent of the change over the past decade. The IMF estimates that the correlation between the Chinese stockmarket and those in other Asian countries has risen to more than 0.3 since June last year (1 is a “perfect” correlation), double the level before the global financial crisis. That is still below the 0.4 correlation between America and Asia, but the gap is closing fast (see chart). According to...Continue reading