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No global punch in stock dive this time

(China Daily)
Updated: 2007-06-01 09:12

When Chinese stocks dropped almost 9 percent in February it caught international investors off guard, triggering a global market sell-off that raised ugly memories of the Asian financial crisis a decade earlier.

By comparison, the 6.5 percent fall in Shanghai shares on Wednesday caused few global ripples, with even stock markets in Asia registering only modest declines. Volatility in currency, commodity and debt markets was also more subdued.

Global investors were less inclined to hit the panic button this time, strategists and fund managers said, because the pullback in China was widely expected and global sell-offs in the past year have proven to be buying opportunities.

"If you look at what happened in February, that kind of a fall was not expected. It came from the blue," said Binay Chandgothia, chief investment officer for Principal Asset Management's Hong Kong operation.

Investors monitor the screen at a securities hall in Beijing yesterday. The Shanghai Composite Index rose 1.4 percent to close at 4,109.65 after the 6.5 percent plunge the day before.

"If you look at what happened on Wednesday, almost everybody on the street had been calling for a correction ... that's one big difference in terms of the trickle down impact of the correction on global markets."

Mainland stocks suffered their biggest fall since the February 27 slide on Wednesday after the government tripled a stock-trading tax in its latest move to curb a market that has nearly tripled in value over the past year.

But Japan's Nikkei eased just 0.5 percent, South Korea's KOSPI closed flat, Australia's S&P/ASX 200 index shed 1.2 percent, and Taiwan's TAIEX fell by less than half a percent.

The yen edged up just 0.2 percent against the euro and 0.1 percent against the dollar. That compares with a jump of more than 2 percent against the dollar on February 27, when some speculators unwound carry trades, in which they had borrowed cheap in yen to invest in higher-yielding currencies.

Emerging market risk spreads as measured by JP Morgan's EMBI+ index widened by one basis point to 155 basis points over US Treasuries. They are near the all-time low of 149 bps. This is in sharp contrast with its move in February when spreads widened by 23 bps.

The Chinese stock market fall did weigh on metal prices, but analysts said losses were limited as the market sought direction from equities for signs of risk aversion that could leave metals exposed.

Market watchers noted that after the Shanghai market's February 27 plunge, it resumed rising the next day and hit fresh highs within a month. The same thing happened this time, with the market rising 1.4 percent yesterday.

The latest fall "will take the heat off some of the regional markets and global investors will generally be cautious," said Mark Konyn, CEO at Allianz Global Investors Hong Kong.

"But as we saw in February the recovery was fairly swift, and our sense is that in China itself, the recovery of this fall will also be there. There'll be buying support in the market."

Konyn said if the fall did deteriorate into a bigger and more significant decline, it would have a psychological effect on investors generally, although that was "not the most likely outcome".

Less global concern

Fund managers and strategists noted that because of capital controls, the mainland market is effectively a closed one with only modest foreign participation. They added that the stock market action has little correlation to China's economy, the world's fourth biggest.

"It's the February precedent, which has reinforced the view that you don't sell into corrections, you buy them," said Malcolm Wood, regional strategist at Morgan Stanley.

Garry Evans, pan-Asian equity strategist at HSBC, said there was no reason for even a meltdown in the Chinese markets to have much of an impact on the rest of the world, even if it affected mainland consumption.