The China Virus
Shu-Ching Jean Chen, 04.20.07, 2:23 AM ET
HONG KONG -
Four years ago, China gave the world the highly contagious disease SARS, which caused regional trade and business to grind to a halt.
Now, it has created a similarly dangerous virus for global equity markets.
On Thursday, a jittery Chinese stock market plunged 4.5%, mainly because of a mysterious decision by the government’s statistics bureau to move a morning press conference announcing the latest gross domestic product figures to 3 p.m., the closing time of the Shanghai and Shenzhen stock exchanges.
That stock market swoon — plus the higher than expected 11.1% rise in GDP in the first quarter — created a domino effect that brought down all other regional markets, European stocks and the U.S. markets as well, at least in the morning.
It reminds us, once again, of how much the world depends on China to deliver steady growth. Yet, it also exposes the paradox the Chinese government is faced with in balancing a red-hot stock market and the need to throttle back the economy to prevent it from overheating.
Long before its official release, Chinese investors were gripped Thursday by another data point: a widely circulated headline inflation figure of 3.3% for March, well above the government's target cap of 3%. That almost certainly warrants a rate hike by the central bank, as with bank deposits earning 2.79% interest, depositors are effectively losing money on their savings.
Analysts say that the migration of money from banks to stocks will continue unless China can tame inflation.
Much of the inflationary pressure in March came from a 7.7% jump in food prices, such as fresh eggs (up 30.4%) and meats (up 16.5%).
Now analysts are expecting a 27 basis point rate hike, the customary increment for the People’s Bank of China, in the next two months, following a rate increase in mid-March. (See: "China Hikes Rates To Slow Lending, Stocks")
Some analysts expect a hike sooner rather than later, but China has rarely hiked domestic interest rates in two consecutive months.
A rate hike would reduce stocks’ advantage over bank deposits and could help well prick the bubbles building up in China’s runaway equity markets.
But Beijing is in a bind over how far it can go in hiking interest rates. Hot money has flooded into China in anticipation of a continued rise in the value of the yuan — foreign reserves now stands at $1.2 trillion, an unprecedented level. Higher rates would attract more money, creating further excess liquidity and feeding inflation, which in turn would encourage depositors to move money into a rising stock market.
Chinese investors seem to have been less concerned than international investors with the higher than expected economic growth figure for the first quarter.
The two Chinese stock exchanges rebounded Thursday, with the benchmark Shanghai Composite Index rising 2.87% to trade at 3543.12 points at midday and the Shenzhen stock index bounding 3.18% to 10,170.57 points. With turnover 20% less than the day before, investors displayed some sense of caution.
The mood was in line with the official stance of cautious optimism over national growth prospects.
A spokesman for the statistics bureau, Li Xiaochao, said the Chinese economy was continuing to grow in a stable, if rapid, fashion, but it also faces problems such as an imbalance in its international accounts, excess liquidity and structural issues.
Most analysts appear comfortable with the GDP data, after delving into the details. JP Morgan’s team said the latest data show "overall industrial activities continued to rise at a sustained, solid pace," a view shared by Deutsche Bank.
Beijing has so far been adopting moderate and incremental measures to cool down its economy, through a combination of raising banks’ required reserve ratios, hiking interest rates and allowing the yuan to strengthen.
Most analysts don’t think Chinese officials are more worried about an overheating economy than a stock market bubble.
“The A-share market bubble is a much more serious risk than the potential of the real economy overheating for the moment,” said Jun Ma, head of China strategy at Deutsche Bank.
“We believe the government will be under increased political pressure to strengthen its measures — and in particular the publicity of these measures — to curb the equity bubble as the Shanghai composite index approaches 4,000.” |
