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Why is Sweden affected by China turbulence?

Published torsdag 7 januari 2016 kl 15.10
"It's one of the major risk factors for the global economy, going forward"
(3:01 min)
Because of its exports, Sweden is sensitive to China's effect on the world economy, says analyst Elisabet Kopelman, at SEB bank. Photo: Loukas Christodoulou/Sveriges Radio
Because of its exports, Sweden is sensitive to China's effect on the world economy, says analyst Elisabet Kopelman, at SEB bank. Photo: Loukas Christodoulou/Sveriges Radio

The Swedish stock exchange has had a terrible start to the year, and an underlying reason is the climate of uncertainty around China's economy and the refugee crisis, says analyst Elisabet Kopelman, at major bank SEB.

On Thursday afternoon the Stockholm OMX is down 3 per cent so far, as part of a global fall across stock markets.

The start of trading in the New Year usually sees a boost for Sweden's companies' shares, but this year saw a sharp fall, wiping out last year's entire rise.

The trigger for the international stock market instability was a fall on the Shanghai exchange. There are fears in China that, while its industrial sector is slowing as predicted, the service economy is not taking up the slack. Smaller investors are now rushing to sell their shares before the ending of restrictions on large shareholders and a potentially bigger crash. There are also fears that the Chinese authorities are not managing the economy well, as they try to keep the yuan weak against the dollar, in what has been called a currency war.

So why is Sweden affected by turbulence in China?

"Sweden is a small and very export-oriented economy", says Elisabet Kopelman, an analyst at SEB. The export sector makes up about 40 per cent of Sweden's economy.

But while Sweden may export to China directly, this Asian giant is only 4 per cent of Sweden's market. The main significance of trouble in China is what it says about the state of the world economy.

"It's one of the major risk factors for the global economy, going forward," says Elisabet Kopelman. "Whether China is moving from a situation where the economy is slowing down, in a controlled way, or whether we're moving to a hard landing, where the economy decelerates at a much more rapid pace."

There were poor reports from China's industrial sector in the fall, and now disappointing figures from the service sector.

And there are often fears that the Chinese dictatorship manipulates its economic figures for political ends. Mauro Gozzo, head economist at export organisation Business Sweden says to news agency TT that the real figures for Chinse economic growth may be less than half of the official 7 per cent reported.

But the fact that China is a dictatorship also means the government has a lot of power to step in if it wants to stabilise the market.

Trading on the Shanghai exchange was frozen as soon as losses reached 7 per cent. And the ban on major shareholders selling their holdings is to be extended.

"Our main scenario is still that if you would see a faster deceleration in growth, the Chinese authorities probably have room to act," says SEB analyst Elisabet Kopelman, although she says this would still be a situation of greater uncertainty.

And for the Swedish market there are other factors contributing to a climate of uncertainty among investors. The record numbers of refugees coming to Sweden have meant a government move to borrow and spend more.

"So that actually means giving quite a forceful boost to the economy in Sweden, in the short-term, but it also adds uncertainty in the long term, how this plays out in the short-term," says Elisabet Kopelman.

She says that that Sweden is in a strong position to navigate any future uncertainty, with strong domestic consumption fuelled by low interest rates. Analyst Jan Dworsky at Handelsbanken agrees, saying to news agency TT, "It is hard to see a truly negative scenario for Sweden and Swedish growth, as things currently stand."

Our journalism is based on credibility and impartiality. Swedish Radio is independent and not affiliated to any political, religious, financial, public or private interests.
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