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Rescue plan rejection to hit investor confidence in China

By Xin Zhiming (China Daily)
Updated: 2008-10-01 09:09

A distraught trader tracks share movements on the floor of the New York Stock Exchange on Monday. The Dow Jones industrial average plunged 777 points, its biggest drop in history, after the US government's financial bailout package failed to pass. [Agencies]

US lawmakers' rejection of the $700 billion rescue plan makes prospects for the US and world financial markets more uncertain and may affect investor confidence in China's stock market, analysts warned.

In the worst scenario, the bailout failure would cause a major decline in US and global financial markets and ultimately affect the real economy.

Analysts said it will cut demand for China's exports, hit its tourism industry and impact the overall Chinese economy.

China needs to make more efforts to boost domestic demand to buffer the impact of reduced external demand.

After the US rescue plan was rejected, dismayed investors sent the Dow Jones industrials plunging 777 points, its biggest ever single-day decline.

The mainland stock market escaped from the impact of the US market slump as it was closed for the seven-day National Day holiday, but Asia-Pacific stock markets opened in a sea of red yesterday, reflecting jitters that US woes would spill over globally.

But the bad news may still hit the mainland market when it resumes trading next week. Considering the fact that it rose more than 25 percent after the government issued a slew of favorable policies since late last month, a post-holiday correction is possible, analysts said.

Economist Joseph Stiglitz warned that without any bailout, the US financial market would implode, bringing the world economy into a recession.

If that happens, China would not escape unscathed. Apart from losses incurred from its direct holdings of US debts and securities, its real overall economy would also suffer, said Sun Lijian, an economist with Shanghai's Fudan University.

Exports would slow as demand for Chinese products declines, he said. Tourism and investment in firms catering to overseas demand would also be affected.

The US, however, will ultimately bail out the financial market even if the House does not approve the current rescue plan, analysts said.

"It must rescue the market from this crisis, no matter how," said Zuo Xiaolei, chief economist of China Galaxy Securities.

With a new rescue plan being discussed among policymakers, "an interest rate cut by the Federal Reserve is now a must to restore market confidence around the globe", said Sherman Chan, an economist with Moody's Economy.com's Sydney office.

"Given the growing stress experienced by financial institutions in recent days, interest rate cuts by major central banks in the coming days seem increasingly likely."

As the US crisis spreads to Europe, governments there have been forced to bail out their financial institutions, with Fortis, the largest Belgian financial-services company, receiving an 11.2 billion euros ($16.4 billion) rescue package from Belgium, the Netherlands and Luxembourg over the weekend after its shares dropped 35 percent last week in Brussels trading.

Ping An Insurance (Group) Co, China's second-largest insurer which has a 4.2 percent stake in Fortis, may set money aside in its third-quarter results to cover losses from the stake, which was more than 10 billion yuan ($1.46 billion) by last week.