China's economic sniffles unnerve global investors

Analysts used to say that if the US economy sneezed, global markets caught a sniffle, say Jennifer Hughes and Robert Cookson in the FT. Now a Chinese sniffle seems to be having "almost the same impact", helping to send major stock indices to multi-week lows.

Last week the authorities introduced restrictions on lending. Those came a few days after banks' reserve requirements were raised from Tuesday. The worry is that growth is set to slow and could even be choked off in the only major global economy that has been growing healthily. Red-hot data last week has compounded tightening jitters. There was a 10.7% jump in annual GDP in the fourth quarter, while in December annual inflation rose to 1.9%, up from 0.8% in November.

But managing a soft landing won't be easy. Growth has been sustained by an investment spree, in turn driven by a state-mandated lending splurge. But as Capital Economics has pointed out, it's hard to see growth staying above the level needed to avoid social unrest without lending stimulus. Domestic consumption and foreign demand are unlikely to pick up the baton.

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But keeping the credit boom going risks bigger trouble later as bad loans and overcapacity pile up. "The entire economy depends on extremely loose lending policies," says Stratfor. And as Seven Investment Management's Justin Urquhart-Stewart puts it, "how do you let the air out of a balloon easily"? Uncertainty over China won't dissipate in a hurry.

However, the direct impact of Chinese tightening on the global economy will be limited, says Capital Economics. China only accounted for 8% of global GDP in 2009, compared to America's 25%. But such is the "hype" about China that the effect on sentiment "will be disproportionate". The commodity markets, where Chinese demand was set to slow anyway owing to stockpiling last year, look vulnerable. This all bodes especially ill for Brazilian equities: raw materials firms comprise half the index.