Mon, Jun 04, 2007 page10

• Chinese downturn not a threat: analysts

  • AFP
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  The spectacular run of China's stock markets has drawn a barrage of warnings that a sharp correction is imminent, but many analysts believe a downturn will do little economic harm at home and abroad.

  Chinese consumer spending, the likeliest victim if share prices dive, will only take a minor hit, while overseas markets have learned quickly to live with a volatile Shanghai bourse, they said.

  "The slump will not have a significant impact on the [Chinese] economy in the short term," said Feng Yuming, a Shanghai-based economist with Orient Securities (東方證券).

  "Consumption won't be affected much unless the market takes a really deep plunge," Feng said.

  One common impact of stock market gains is what economists describe as the "wealth effect," the desire of investors to spend more once their assets increase in value, as they feel richer. The flip side is that when their assets lose value, they will also tend to spend less.

  The World Bank, however, echoed the views of a range of economists when it said last week this was unlikely to be a major factor if the stock markets plunge in China, because only a tiny portion of total wealth is tied up in stocks.

  "The impact on the real economy via reduced consumption and investment is likely to remain limited," a World Bank report said, pointing out the value of all shares held by individuals amounts to just one-sixth of China's economy.

  Other statistics confirm this conclusion. Chinese stock investment makes up only 5 percent of national savings, with 95 percent still kept in cash and bank accounts, Societe Generale said.

  JP Morgan also pointed out in a recent research note the Shanghai A-shares market had historically not been a good leading, or lagging, indicator of the Chinese economy.

  "In the past decade, we have noticed the apparent divergence in performance between the real sector and stock markets in China," JP Morgan said.

  "Caution is warranted before jumping to any conclusion about the economy based on the stock market performance," it said.

  Another factor is that even if the Shanghai Composite Index fell 30 percent from its current level of around 4,000 points, share prices would still only decline to their values in January.

  Similarly, many economists dismiss concerns that a significant correction in China's stock market would send shock waves around the world, according to Glenn Maguire, chief economist for Asia Pacific at Societe Generale.

  "Markets are now viewing what happens in [the Chinese equity market] as purely a domestic phenomenon that is not seen as significantly derailing economic growth in China, which remains far more important for global markets," Maguire told a forum in Beijing.

  Maguire noted that China's A-share market, which surged 130 percent last year and is up more than 50 percent this year, holds little sway over other financial markets -- with A-share investors generally not holding equity portfolios in other markets.

  The world got a taste of what could be around the corner when stocks fell 6.5 percent on Wednesday after the government announced a tripling of a transaction tax.

  While a one-day fall of nearly 9 percent on Chinese markets in February sparked a global rout, the world reacted much more calmly on Wednesday.
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