Not that long ago, stockbrokers could always predict the kind of the day ahead at the office.

There was a time when a stockbroker could get out of bed, turn on the radio or TV and see what happened overnight to the Dow Jones index. If Wall Street was up, the Australian market would surely follow and all would be well for the broker and his clients.

While if Wall Street fell, he would know some clients would be on the phone even before they got to the office. But something strange has happened in the past few years.

Australian Unity Group Executive –Investments, David Bryant, says the Australian market is looking further than Wall Street.

"Now everyone seems more interested in markets in Asia – China in particular. Wall Street is still relevant, but it doesn't shape the universe anymore.

"The correlation between our market and Wall Street continues to weaken and China's position continues to emerge."

Economic might

The influence of Asian sharemarkets on investors in Australia and the rest of the world was highlighted in late February when share prices on the Shanghai Stock Exchange plunged by nine percent in a single day.

While the Shanghai Exchange is the largest on mainland China, it's smaller than our own Australian Stock Exchange.

But the share panic in China triggered a wave of selling on major markets worldwide, including a four percent slump in the Australian market. Prices have since recovered, but what does it mean when Shanghai leads the way instead of New York? Why did it happen and are we vulnerable to more such volatility?

David says there are three reasons which have given China its new influence on the Australian sharemarket.

"The first reason is the growing power and presence of China in its own right. Shanghai is the world's fastest growing stock exchange by a huge margin. The value of all shares listed in Shanghai grew by 188 percent in the year to February 2007, from $US0.32 trillion to $US0.92 trillion. This was more than four times the next biggest growth rate – for Hong Kong –which of course is also part of China. But even these figures don't really illustrate the economic might of China.

"It is now the third largest economy behind the US and Japan, and is set to overtake even these economic powerhouses."

Massive demand

China's role in driving global demand for all kinds of services and commodities is the second reason for its strengthening influence. Half of the all the cement in the world will be used in China next year.

The third reason, which is very specific to Australia, is the incredibly long and huge resource-based boom. China is leading the boom and Australia is in the middle of it.

David says the Australian sharemarket is vulnerable to more shocks from China, but not because the China miracle is about to end any time soon.

"China's economic boom has barely started. It's been suggested to me that events in China are equivalent in global economic impact to the Industrial Revolution. None of us have seen anything like it. You can get a little carried away, but there's still 1.3 billion people who are clamouring for infrastructure and improved living standards. The capitalist story and the economic story are just beginning to unfold."

Government intervention

David says the potential for financial shocks from China has more to do with the Government's role in the market rather than a weakening of the underlying growth story.

"The wild card in China is that the markets are not entirely free. The correction we saw in March began with rumours that the Government was set to dampen share prices by selling some of its large stock holdings in state-owned companies.

"The sales never occurred, but even the hint of such a possibility had a huge effect on prices and reminded everyone who is in control.

"While we like the idea of the China story, people often forget that its markets can change overnight at the whim of government. A reminder like the one we had in March, can cause some panic."

China is not the only powerhouse to emerge in the new world order created by globalisation. India, Russia, Brazil and Mexico are all expanding at rates in excess of most of the 'old' economies of the US and Europe.

These countries are home for innovative and aggressive corporations that are using their new financial strength to pursue expansion outside their national borders.

The acquisition of Rinker, formerly part of CSR, by Mexican-based Cemex in the largest cash takeover in Australian history, is a leading example of this trend.

It adds another new dimension for local investors, and raises the question of whether Australia will become merely a branch office for companies in the rest of the world.

New world order

David says Australia is a resource-rich country and that gives us a role to play in the new world order.

"Countries that don't have our resource base have to look for other ways to participate in the global economy, such as service industries or low tax rates for international investors.

"But you can't have it both ways. If you want China to grow and to fuel economic demand, the logical longer-term consequence is China will become an economic power.

"To my mind, it's unstoppable. While it has taken a while to come, it will not be too far down the track before China drives the global economy."

Does this mean local investors should change the way they invest? Should they invest directly in shares and property in China, or continue to ride the benefits of the resources boom at home?

David believes there are benefits in thinking local.

Think local

David says rapidly developing new markets will have potholes for investors, and some of them will be pretty big.

"China in particular is hard to predict because the markets are subject to government intervention at any time.

"Investing locally removes some of those risks. You can get some of the benefits that stem from the China growth story by investing in Australian companies in the resources industry, or in the businesses that provide services to them."

David adds that globalisation, which is simply an increase in connections between businesses and markets across national borders, creates particular challenges for fund managers in Australia.

"Globalisation has created some very dynamic forces in the world economy. Australia is a very successful economy, but we are still small by international standards and easily impacted by these forces. At this time, and over the next three to five years, we think the growth of countries like China and India make the resources-heavy Australian market a pretty good place to invest."

World's biggest stock exchanges – Market capitalisation $US trillion

* Includes Paris, Amsterdam, Brussels & Lisbone
Source: World Federation of Stock Exchanges and ASX.