U.S. investors may see indirect effect

American investors have few direct links to the flagging Chinese stock market, but the indirect fallout from the plunge of the Asian giant’s benchmark index could be protracted and painful for parts of the U.S. economy, experts said.

The average retail investor in the U.S. tends to have what’s known as a home bias, disproportionately investing in domestic names they know.

Their exposure to China comes through emerging markets funds, which tend to take up roughly 5 percent of the typical portfolio, said Patricia Oey, a senior analyst with Morningstar.

And such funds usually stick to shares listed in Hong Kong rather than via the mainland Shanghai Composite Index, which has dropped by a third since mid-June after gaining spectacularly since last summer, she said.

For American investors, however, “the impact is pretty muted,” Oey said.

Unlike in North America, “there’s not as much of a relationship between the Chinese equity market and its underlying economy,” said David Doyle, an analyst with Macquarie Capital Markets.

Chinese households generally have less than 10 percent of their net worth tied up in stocks, he said. Corporations, many of which are state-owned, tend to rely on banks instead of shares to fund their expansion plans.

And despite the recent plunge, the Shanghai Composite is still up from a year ago.

The probability of damage stateside seems low, Doyle said. The current strength in the American economy is driven not so much by overseas investment but by local consumer spending, he said.

“That driver of growth is going to continue – the underlying momentum in the U.S. economy remains firm and strong,” Doyle said.

Investors remain jittery, however. Debt-racked Greece is on the verge of potentially toppling out of the Eurozone. Trading on the New York Stock Exchange was abruptly halted Wednesday – “not the result of a cyber breach” but an “internal technical issue,” according to NYSE officials.

“There are a lot of things going on in the market,” Oey said. “But what’s happening in China is certainly impacting sentiment.”

If the Shanghai stock market free fall rattles the overall Chinese economy, the dollar could continue to strengthen, hurting exports out of major American trade gateways such as Los Angeles, said Wells Fargo senior economist Mark Vitner.

The domestic real estate market, which has enjoyed a flood of Chinese buyers snapping up residential and commercial properties all over the West Coast, could also suffer, he said.

The global commodity markets are already feeling the pinch as prices collapse for copper, scrap steel, oil and iron ore, Vitner said.

“Most of the growth in major industrial commodities has been in China,” he said. “If China’s economy slows, demand for all of those commodities will slow.”

The nation has already seen its furious growth pace lag recently, and American businesses with ties to China have begun scaling back production and investment there.