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Analysis: Views on Chinese economy changing

Two years ago, nobody would have noticed if China's stock markets had suddenly plummeted nearly 9 percent in one day.

But the global sell-off last Tuesday, sparked by concerns over China's economic growth, reverberated around the world, pitching other Asian markets lower and taking bourses across Europe and the Americas with it.

Many were quick to dismiss the impact of the drop on China's fledgling exchanges -- the steepest one-day decline in Shanghai in 10 years -- but the global knock-on effect was also an indication of how investors' perceptions about the Chinese economy have changed.

"Greater global attention is on the Chinese economy today, so this kind of huge volatility makes overseas investors far more sensitive," said Yan Li (閆莉), a Beijing-based analyst with Southeast Securities (西南證券).

The sharp declines worldwide were prompted in part by anxiety that China's roaring economy -- bounding ahead at annual growth rates of about 10 percent -- may be in for a bumpier ride, especially if the US economy were to slow down.

Compounding these worries were reports that former US Federal Reserve chairman Alan Greenspan had suggested the US economy could be fighting off a potential recession by the end of the year.

"Overseas investors have interpreted the market's fall as a warning that China's economy is overheated," said Cheng Weiqing, an analyst at Citic Securities (中信證券) in Beijing.

"Western investors believe that there are some problems showing up in emerging markets [like China]," Cheng said.

Driven by cheap labor, copious investment and waves of exports, China has been a major driver of global economic growth since it joined the WTO in late 2001.

The meteoric rise of the world's fourth-largest economy has stoked global growth, but also heightened fears that China teeters on the brink of the kind of overheating that could provoke an inflationary crisis.

Asian countries capitalizing on China's boom especially worry that a slowdown in the regional giant's economy could lead to unwelcome consequences at home.

Most markets in Asia had a tough time shaking off the effects of the volatility that dropped the key Shanghai index 5.5 percent lower on the week.

But analysts also cautioned against linking too closely China's economy and its bourses with declines in other markets.

"Global markets, already on edge from Iran and Alan Greenspan mentioning the `recession' word at the weekend, and highly leveraged, were looking for an excuse to sell off, and China provided that," said Stephen Green, an economist at Standard Chartered in Shanghai.

China's restricted share markets, with total capitalization of about US$1.5 trillion, were not an accurate barometer of the national economy like in other countries, analysts said.

"Although China stock markets have become more important to the Chinese economy, they are not as important as people imagine," Yan said.

Central to that argument was that the declines in China on Tuesday were blamed on a rumored capital gains tax on stocks investments, testament that the country's bourses are still driven more by policy than economic fundamentals.

"The Chinese market has a psychological tradition in that investors believe government policy is the key element that influences the market," Yan said.
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