Did Treasury misread China's market impact on U.S.?
The U.S. stock market showed strong linkages to China's market this week, a few short months after Treasury Secretary Jack Lew strongly implied that China's market and the U.S. market have almost no direct linkage.
"I will say that China's markets still are pretty much separated from world markets," Lew said at the Brookings Institution in July. "They're, obviously, moving towards being more integrated, but right now they're not."
"So you're not going to, I don't think, see the direct linkage there," Lew added.
He gave those responses after being asked whether the U.S. has anything to fear from the meltdown in China's stock market over the last few months. Lew also seemed to indicate that China's stock market doesn't necessarily reflect what's going on in China's core economy.
Despite those remarks, the U.S. stock market seemed to be paying strict attention to China's stock market over the last few days. The U.S. market followed China's right down a sinkhole last week, after China's market fell 4.2 percent on Friday.
Nervous traders in the U.S. followed suit, and the Dow Jones average fell more than 500 points on Friday. Most stock analysts said concern about China was at or near the top of people's lists of reasons to be nervous.
The U.S. kept a close eye on China on Sunday evening, when China's markets opened again Monday morning local time. The Shanghai Composite lost 8.5 percent Monday, and as U.S. traders were set to begin their own Monday of trading, Dow Jones futures indicated a 600-point drop, a direct response to the free-fall in China.
The Dow would lose more than 1,000 points in early trading, then recover, but then fall back again to lose 588 points.
By Monday night, many analysts were saying a key ingredient needed to stop the free-fall in the U.S. was some new policy from the Chinese government, another sign of that linkage that Lew said didn't exist.
China's market fell another 7 percent on Tuesday, and is now down more than 40 percent for the year. But after the markets closed in China on Tuesday, the government stepped forward to announce a cut in its key interest rate, and reduced bank reserve requirements.
The U.S. market seemed to be well aware of China's policy move, and responded positively to China's intervention. Futures markets showed an increase, and just a few minutes after the markets opened, the Dow, NASDAQ and S&P indices were all up more than 2 percent.
But even then, it wasn't enough, and Tuesday ended with another drop.
Republican presidential candidate Donald Trump also seems to disagree with Lew's assessment from July. He said Monday that he sees how the U.S. is linked to China, and said he's work to create some distance between the two countries if here were to win the White House.
"You'd better start uncoupling from China, because China's got problems, and they have big problems and they're bringing us down," he said Monday on Fox News.
In July, Lew did note that the Treasury Department does believe how China responds to its equities market is "critical," and called on China to make more market-oriented reforms.
"[W]e've seen over the last several years, really the last two years is a quite determined commitment to reform agenda in China, where they have very clearly set forth a plan to move towards having much more market forces in China's economy," he said. "And what I said repeatedly is the question isn't their commitment to the goal, the question is the pace at which they implemented it, and do they do it fast enough for to be effective."
"I hope this is not something that slows down the pace of reform," he added.
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