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Region's markets hit especially hard

January 23, 2008|Don Lee | Times Staff Writer

SHANGHAI — Xie Xiaolan couldn't tell you what sub-prime loans are, but she knows they must be something bad washed ashore from the U.S. That's what other investors at Guoyuan Securities here were telling her Tuesday as China's stock market fell 7%, on top of a 5% drop the previous day.

"I'm too scared to watch," said Xie, a retired accountant who has lost more than $13,500 this week, about one-seventh of her stock investments. In front of her in the packed trading hall was a large electronic tote board covered in green -- the color in China that denotes stocks in decline.

"I think the boom market is over now," she added. "When the market comes back a little, I'm going to sell and run."

Asian investors, among the hardest hit during the sell-off the last two days, may take some comfort in the steep U.S. interest rate cut orchestrated Tuesday by the Federal Reserve. The action helped falling U.S. markets rebound from their lows and lifted stocks in Europe. This morning, markets opened higher throughout Asia.

Analysts say part of the reason Chinese and other Asian markets have fallen particularly hard is that they were exhibiting bubble-like conditions. Last year, Shanghai's composite index soared 97% and India's about 50%.

Foreign investors have been yanking funds from Asian markets as doubt grows about the so-called decoupling theory -- the idea that Asia may be shielded from a U.S. downturn because it has China and India, and to a lesser extent, Europe, to provide a cushion.

On Tuesday, Hong Kong's Hang Seng index slid a whopping 8.7%, after falling more than 5% the previous day. Trading in India was halted after markets opened nearly 10% lower, finishing down 4.6% on top of a loss of 7.4% on Monday. Indonesia's stock index added to its losses for the week by plunging almost 8% on Tuesday and Australia's market was down more than 7%, the steepest drop since 1989.

A lot of money managers "have been a bit overexposed to the region because they had felt it was relatively safe," said Kirby Daley, a Hong Kong-based strategist for the brokerage Newedge Group.

Economists worry that falling stock markets will erode confidence and damp domestic consumption in Asia. What's more, Asia may not have as strong a cushion as once hoped for in Europe, whose economy looks vulnerable to a slowdown as well.

Japan is a particular concern. Some analysts fear that it may be heading for its own recession, with its export-driven economy heavily dependent on sales to the U.S. (Tokyo's Nikkei 225 index plunged 5.7% on Tuesday after a 3.9% decline a day earlier -- the worst two-day fall in 17 years.)

Although China's economy is expected to continue expanding in 2008, its growth alone could not prop up the region. Countries such as South Korea export more to China than anywhere else, but many of those goods are processed and sent to consumers in the U.S.

Complicating matters, Beijing has been tightening credit and taking other steps to contain inflation, and management of that will affect the pace of China's gross domestic product growth, including imports from elsewhere in the region.

"That's a big question: What's the collateral damage [of fighting inflation] to GDP growth?" said Tim Condon, chief Asia economist for ING Financial Markets in Singapore.

China's stock market is often seen as divorced from the broader economy, but in the last couple of years tens of millions of ordinary people have gotten into the action. Consumer spending has risen as investors have seen their portfolios rise in value, and many people have put their retirement funds in the market. But government officials have expressed concern about investors engaging in wild speculation and having unrealistic expectations. Analysts worry that a sharp reversal of fortunes could lead to social unrest.

Last February, the Shanghai index plummeted 8.8% in one day, its largest drop in a decade, on rumors of government moves to curb that highflying market. That triggered a brief worldwide sell-off.

The Shanghai market hit a peak in October and since then has struggled. So far this year it is down 13%.

The steep drops Monday and Tuesday were perhaps all the more surprising given that many Chinese had expected the government to take steps to make sure the market remained steady before the Summer Olympics in Beijing.

As panic spread at trading halls, many investors were trying to make sense of why stocks were falling so fast. One factor was reports that the Bank of China was facing large write-offs from sub-prime-related investments. That contributed to a sell-off in banking stocks.

"The Communist Party just wants to take our money," said an 86-year-old retired factory worker in Shanghai, who gave only his last name, Zhang. The rail-thin man said a good chunk of his $6,900 in stocks was in banking. He said he had lost about $1,400 in two days. "If I sell now, they will earn my loss and collect taxes from me."


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