CHINA ROARS BUT IT'S STILL TOO YOUNG TO BE CALLING ALL THE SHOTS
By Geoff Dyer in Shanghai and Joanna Chung in Hong Kong
Thursday, March 01, 2007
Shanghai's new status as a weathervane for global markets proved to be short-lived after the stock market in mainland China rallied strongly yesterday in spite of sharp falls in the rest of Asia and Europe.
The dramatic trading on Tuesday, when the mainland market plunged 9 per cent, had raised the prospect that China was developing the capacity to spread global financial contagion. Halfway round the world, traders on Wall Street were blaming the Shanghai market for Tuesday's 3.5 per cent drop in the S&P 500.
Indeed, there was some subdued pride among Chinese traders that the biggest one-day drop in a decade in Shanghai had also demonstrated the apparent importance of the country in global markets.
“This probably can be viewed as a drill for China's stock market to get more pricing power in international markets,” said Zhang Yidong, analyst at Industrial Securities in Shanghai.
Brian Baker, head of Pimco Asia, added: “What happens in one part of the world, even in a relatively closed economy like China, can affect asset prices around the globe.”
Yet, in China yesterday, there was also a lot of head-scratching – not just about what actually really happened in the mainland market on “black Tuesday”, as it is now being called but also about why the rest of the world seemed to care so much. With no economic news coming out, analysts struggled to find a convincing explanation.
Some analysts suggested that, with the National People's Congress beginning in Beijing next week, investors feared new policies or comments designed to talk the market down.
At the weekend, the government had announced renewed measures against illegal stock-trading and rumours circulated about the introduction of a capital gains tax for equities, even though few analysts think such a policy likely. Investors were also discussing the possibility of a new interest rate rise to counteract the inflationary impact of higher food prices.
Steven Sun, of HSBC, added that $4.4bn of shares that used to be non-tradeable will potentially come onto the market in March under a government reform plan.
Yet most of these concerns had been doing the rounds for several weeks. The most likely explanation, analysts said, was a bout of profit-taking.
The mainland market was up 130 per cent in 2006 and broke the 3,000 point mark for the first time on Monday, which was a signal for many institutions to temporarily retreat.
Harder to explain was why a sharp fall in the Shanghai market should have such a big impact around the world.
The Chinese economy is vulnerable to weakness in the US, especially given the importance of the export sector, yet analysts say that the Shanghai market does not respond quickly to changes in US consumer sentiment. The big listed companies are largely inward-facing: 30 per cent of the Shanghai Composite index is taken up by China Life, Bank of China and Industrial and Commercial Bank of China alone.
The stock market has proved to be a poor barometer for the economy. From 2001-2005, when GDP grew at around 9 per cent a year, share prices fell by half.
On top of that, mainland stocks are relatively insulated from the cross-border capital flows that influence other markets. Chinese residents have few options if they want to take their savings offshore and foreign investors are restricted to buying around $10 billion of mainland shares.
Indeed, one reason why foreign investors have become so interested in the Chinese market over the last year is the perception that it provides a form of hedge because it is largely driven by domestic sentiment rather than Fed announcements or worries about the “carry trade” that affect so many other markets.
There are many ways China can rattle global markets. A sharp economic slowdown would likely end the commodities boom and if China were to stop using its reserves to purchase US Treasuries, bond markets would suffer. But of all the things investors need to keep their eye on at the moment, the Shanghai stock market is probably not one of them.
