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China market a new equation for investors

Cash that drives shares in Shanghai also keeps U.S. interest rates low. Learn to read the swings, analysts say.

March 01, 2007|Don Lee | Times Staff Writer

SHANGHAI — It may have been the day Chinese investors shook the world.

Even as U.S. stocks stabilized Wednesday, analysts and investors were left wondering how Tuesday's 8.8% plunge in the market here launched a wave of selling that traveled around the globe.

Few people could have expected that a drop in Shanghai would be felt so widely. After all, China's 16-year-old stock market is undeveloped, small and volatile.

The Shanghai Stock Exchange is a speck among world markets and not very significant in China's own economy. But China has come to loom large for many countries and multinational companies.

Foreign investment in China's stock market accounts for less than 3% of its value. But a growing number of major U.S. corporations, including General Motors Corp., Wal-Mart Stores Inc. and Starbucks Corp., have placed large bets on China's economy and are looking to the world's most populous nation for a bigger chunk of their future earnings.

"This is a new experience and all bets are off," said Oded Shenkar, a management professor at Ohio State University and author of "The Chinese Century," which focuses on China's rise in the global economy.

He and other analysts said that, like it or not, investors in the U.S. and elsewhere may have to learn to better read and respond to wild, unpredictable swings of a foreign stock market in which a nominally Communist government wields a heavy hand.

Some American investors might be shocked to know that their losses Tuesday were partly caused by waves of rumors several thousand miles away -- chatter that the Chinese government was about to take steps to cool the highflying Shanghai market.

"For the first time, we have a stock market [in China] under a very different system," Shenkar said. "There are going to be lots of things happening, including increasing volatility, partly because of our inability to interpret signals from a market that behaves differently and is governed by different rules."

To be sure, the U.S. stock market, not China's, is widely considered the key indicator of the global economy's condition. And there were factors other than China behind Tuesday's sell-off, which continued Wednesday in much of Asia and Europe.

A confluence of events Tuesday, including an admonition from former Federal Reserve Chairman Alan Greenspan that included the word "recession" and an unexpectedly sharp drop in factory orders for U.S. big-ticket items, contributed to the 416-point decline in the Dow Jones industrial average. The 3.3% one-day loss was the largest in four years. On Wednesday, the Dow rose 52 points.

Economists said a pullback was overdue for many markets because stocks had soared in recent months amid ever-increasing investment supported by cheap credit and an abundance of exuberance.

Shanghai's benchmark index rocketed 130% last year and was the best performer among the world's larger markets.

China's economic boom and massive trade surplus with the rest of the world have left the country flush with cash. In turn, the Chinese central bank has invested much of that "liquidity" abroad, for example in U.S. Treasury bonds. That has helped keep interest rates low, encouraging investors in the U.S. and elsewhere to channel money into stock markets worldwide in search of higher returns.

"The liquidity story is pushing up the Dow" and shares in other markets, said Tim Condon, chief Asia economist for ING Financial Markets in Singapore.

Because of China's growing clout in global financial markets, the dive here Tuesday set off alarms worldwide.

"When China goes down like that, people start to question their own convictions," said Andy Xie, an independent economist in Hong Kong.

Many analysts believe that China's stock pullback didn't reflect a change in the emerging nation's economic outlook. China, along with the U.S., has been an engine of the current worldwide economic boom.

Inside the main trading hall in Shanghai on Tuesday, the buzz was the possibility that the central government, worried about an overheated market, was about to take action to cool things down.

Investors fretted about unconfirmed reports that officials might reimpose the capital-gains tax that had been lifted in 1994 to boost the then-sagging market. There was also talk of regulators taking a harder line in enforcing rules that bar banks from giving loans for stock plays.

"Many of the moves in the market are not rational," said Chen Wei, a brokerage manager at Xiangcai Securities Co. in Shanghai. "There was no reason for such a fall [Tuesday] because there was no big change on policy and market situation. But some unfounded rumors caused people to run from the market at any price."

On Wednesday, buyers returned and China's market bounced back, recovering almost half of the previous day's loss, but fell modestly this morning.

Inside a smoke-filled brokerage in southwest Shanghai, Wang Zhen, a 27-year-old teacher, was in line Wednesday to open a new account. She was prepared to sink her savings of $2,500 into stocks.

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