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China Worries Worsen Asian Plunge Stock markets in Asia continue to plummet on concerns about a U.S. recession and a slowdown in China's economic growth
Investors react to stock indexes at a securities company on January 17, 2008 in Chongqing Municipality, China. Following a dive in US stocks, the Shanghai Composite Index closed with the largest one-day decline in six weeks.
Asia-Pacific markets last year were propped up by investor confidence that China and its hot economy would offset negative impact from any slowdown in the U.S. That Chinese life raft is now seriously leaking. Stock markets throughout Asia took a hammering on Jan. 21. And with the U.S. futures markets expecting a 500-point plunge in the Dow Jones industrial average when American markets reopen, the rout continued on Jan. 22 in Asia as worries about a recession in the U.S. and a slowdown in China continued to scare away investors. In Japan, the Nikkei 225 ended the Jan. 22 session down 5.65%, to 12,573, as the index fell below 13,000 points for the first time since October, 2005. The steep fall came after a 3.86% dive the day before. Hong Kong's Hang Seng index followed its 5.5% drop on Jan. 21 with a fall of another 8.65% on Jan. 22, and Shanghai was down 7.2%, after a 5% drop a day earlier. South Korean shares fell sharply, with the benchmark Kospi index falling 4.4% after declining 2.95% the day before. "The contagion effects are spreading rapidly," says Ahn Young Hoe, chief investment officer at Seoul-based fund manager KTB Asset Management. "The epicenter is the U.S., but Japan and Europe have been hit and China doesn't appear to be free from the shock now." In the process, the "decoupling" theory—that a sinocentric Asia would buoy the world while the U.S. sank into recession has been shredded. Companies with China exposure are now taking the hit. Declines in Korean shares have been led by shipbuilding and steel shares that benefited the most last year from China's sizzling growth. Samsung Heavy Industries, one of the country's largest shipbuilders, dropped 6% on Jan. 22 while Hyundai Steel, a leading Korean steelmaker, fell 6.5%. In Australia, shares fell again, continuing an uninterrupted two-week drop that has seen big declines in resources heavyweights such as BHP-Billiton (BHP), which had been riding high, thanks largely to growing demand from China. The Anglo-Australian giant's shares have dropped 22.8% so far this year. Cooling Off at a Bad Time As in other parts of Asia, investor worries about China start with questions about how many more billions of dollars banks such as Bank of China will need to write off because of bad bets on U.S. subprime securities (BusinessWeek.com, 1/16/08). But the fears extend far beyond the U.S. financial crisis to other issues. China may be cooling off at just the wrong moment for world economic growth. Beijing has been trying to slow down the Chinese economy, which last year grew at close to a 12% clip. To do that, the government has been letting the Chinese currency, the yuan, appreciate at a faster pace against the U.S. dollar. The government also has been raising reserve requirements for Chinese banks. Starting Jan. 25, the amount that banks need to keep on reserve with the People's Bank of China, China's central bank, will jump another 50 basis points to 15% of their total deposits. At the same time, to combat inflation that's running at more than 6.9% in November, the government on Jan. 16 introduced price controls on food and liquefied petroleum gas. "We have already seen shortages of coal and fights over gas," says Garry Evans, Asia Pacific equities strategist at HSBC (HBC) in Hong Kong. "These problems will get exacerbated. Companies will cut back on production if they are making a loss on every unit."
While the measures are starting to have an impact in cooling off the Chinese economy, they're also hurting earnings at Chinese companies that have become accustomed to growth numbers heading in one direction only, up. China's exports are set to slow dramatically this year, according to Stephen Green, an economist in Shanghai with Standard Chartered Bank (STAN.L). Last year, for instance, exports accounted for 2.5 percentage points of the country's GDP growth, but in 2008 that figure will shrink to 1.3 percentage points and next year will fall to zero. Spillover into Hong Kong, Taiwan As demand from the U.S. and other markets causes China's export engine to sputter, more Chinese companies will be focusing on the domestic market and cutting prices to gain market share. "You will see more price pressure," predicts Green, who expects China's GDP growth to drop two full percentage points this year, to 9.5%. The recent performance of China's largest fixed-line telecom operator, China Telecom (CHA), provides a sense of just how bad Chinese price wars can get. The state-controlled company on Jan. 21 reported that it had lost a record 1.48 million subscribers in December due largely to intense competition from rivals China Mobile (CHL) and China Unicom (CHU), cellular operators that have been slashing prices to pick up customers. Problems in China's corporate sector could spill over into the rest of
Greater China, where Hong Kong and Taiwan have become increasingly
dependent on growth from the mainland. Hong Kong's tourism and retail
industries have been big beneficiaries of spending by Chinese visitors,
and that's helped drive down the city's unemployment rate to just 3.6%. In Japan, the subprime-inspired slowdown in the U.S., Japan's largest export market, and the rising yen, which moved above 106 yen to the dollar in morning trading Jan. 22, are major concerns for exporters. Shares in Nissan (NSANY), which makes more than half its earnings in North America, are off 25% this month alone. "It is quite difficult to take an optimistic attitude toward the U.S. market [as a whole]," Nissan Chief Operating Officer Toshiyuki Shiga told reporters in Tokyo on Jan. 21, although he said Nissan, which increased U.S. sales by 4.7% in a shrinking market in 2007, was in good shape. Adding to the downward momentum, there are also worries that Japan's domestic economy is slowing. The Nikkei newspaper reported Jan. 22 that new condo offerings had slumped to a 14-year low, although one reason for the falling supply is the botched introduction of stricter housing standards last year, which slowed down new building starts. The government has already trimmed its GDP growth target for the year to 1.3%, down from 2.1% a year ago. And the Cabinet Office's monthly consumer confidence survey shows consumer sentiment has been on a slide since the end of 2006 amid sluggish wage growth. "A recession is not our baseline scenario, but we see a heightened risk of one, particularly given the shaky global backdrop," wrote Kenichi Kawasaki, chief economist at Lehman Brothers (LEH) in Tokyo, in a note to clients last week. While it's unclear how much worse things will get in the U.S., there's some reason to hope that the situation in China might improve later this year, says Cho Yong Jun, head of research at Shinyoung Securities in Seoul. The Chinese authorities may relent in their battle against inflation if local food supplies increase and food prices drop. Until then, though, the picture doesn't look good. "We are going to have a cold winter," says Cho. 2008-01-31 |
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