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Goldman Sachs: US Economy Mostly Insulated From China's Stock Plunge

By    |   Monday, 20 July 2015 04:07 PM

China’s stock-market plunge won’t have a major effect on U.S. business activity unless the Asian superpower’s economy slows substantially, Goldman Sachs Group Inc. said.

The Shanghai Composite Index fell by as much as 30 percent this month before China took steps to support share prices. The plunge triggered concern that millions of individual investors were losing money and delaying big-ticket purchases like cars.

“Consensus growth forecasts for China have been trending down slowly in recent years, and surprisingly weak first-quarter growth data raised the possibility of a more sudden deceleration,” Jan Hatzius, head economist at Goldman, said in a July 18 report obtained by Newsmax Finance. “Recent risks have refocused attention on potential spillovers to the rest of the world.”

China has grown to about 15 percent of the global economy in recent years, but the U.S. is mostly insulated from the region, according to Goldman. A slowdown in China would have a limited effect on U.S. exports and corporate profits, while weakening demand for raw materials may help American businesses.

“Although foreign profits account for one-fifth of total U.S. corporate profits, profits earned in China account for just 0.5 percent,” the report said. “China accounts for only about 0.25 percent of the equity and fixed income holdings of U.S. residents.”

If China’s economic growth were to slow by 1 percentage point, U.S. gross domestic product would decelerate by only 0.06 percentage point, Goldman estimated.

“If China were to experience a more severe slowdown … then the potential impact on U.S. growth could be more substantial,” according to the report co-authored by Goldman economists David Mericle and Karen Reichgott. “In addition, the impact of a credit-bust crisis scenario would surely be much more severe.”

Funds that invest in Chinese stocks this week reported $5.3 billion in outflows, partly reversing record inflows of $13 billion a week earlier, said Bank of America Merrill Lynch.

Funds that focus on U.S. stocks received $5.2 billion of inflows, the biggest portion of the $8.3 billion that equity funds lured worldwide, according to the bank which cited data from EPFR Global.

Greece’s financial crisis, China’s stock-market plunge and Puerto Rico’s missed debt payment “have not prevented a big rotation out of bond and money-market funds into equity funds since late May, early June,” Michael Hartnett and Brian Leung, BofAML investment strategists, said in the July 17 report.

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China's stock-market plunge won't have a major effect on U.S. business activity unless the Asian superpower's economy slows substantially, Goldman Sachs said.
Goldman Sachs, China, stock
Monday, 20 July 2015 04:07 PM
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