Tuesday, June 05, 2007

Beware: China's market free falling. How long will they keep buying US bonds? This could have eventual dollar implications

China's stock market plunges 8.3%


China's loss appears to be other Asian stock markets' gain.

While Chinese stocks plunged 8.3 percent yesterday for their biggest one-day fall since a February drop that triggered a global sell-off, markets in Australia, Indonesia, Singapore, South Korea and the Philippines rose to record highs. Tokyo's Nikkei 225 index edged up 0.08 percent, and Hong Kong's benchmark index rose 0.6 percent.

Even U.S. and European shares largely shrugged off the decline in Chinese shares, with the Dow Jones industrial average and Standard & Poor's 500 eking out slight gains to set new closing highs.

The results were a far different outcome than in February, when an almost 9 percent decline in the benchmark Shanghai Composite Index set off alarm bells across global bourses.

Yesterday, the Shanghai Index tumbled to 3,670.40, falling for the third time in four sessions since the government raised a tax on trading last week to cool a market boom. The index had dropped 2.7 percent Friday.

The Shenzhen Composite Index for China's smaller second market fell 7.9 percent to 1,039.90.

It was Shanghai's biggest decline since Feb. 27, when the main-market composite index slid 8.8 percent, triggering sell-offs in Hong Kong, New York and London.

"There is the risk that this snowballs into a crash. Sentiment is so fevered that a bubble could burst," said Claire Innes, an economist in London with the consulting firm Global Insight.

But the effect of the Chinese decline on markets abroad was expected to be limited because Beijing keeps its markets largely isolated from global financial flows. Most Chinese shares are off-limits to foreign investors, and financial controls prevent most Chinese from investing abroad.

The Chinese currency, the yuan, fell slightly against the dollar yesterday after rising throughout May.

Beijing is trying to cool a boom that by last week had pushed up Chinese stocks more than 50 percent since the start of the year. The rally has attracted millions of first-time investors who are pouring their savings into the market.

Government financial newspapers tried to reassure investors with front-page editorials yesterday that said the tax hike on stock trades -- from 0.1 percent to 0.3 percent -- would be good for the market by encouraging longer-term investment in better stocks.

But blue chips were hammered as shares in about 1,000 of the 1,400 companies on the main "A"-share market fell by the maximum daily limit of 10 percent. They included Tsingtao Brewery and China Petroleum & Chemical Corp., also known as Sinopec, two of China's most prominent companies.

Beijing has given no sign how much it wants prices to fall, but economists say Chinese leaders might consider 20 percent to 25 percent the right level to restore order to the market.

Drops in Chinese prices last week caused brief declines in markets in Tokyo, Hong Kong and elsewhere.

Analysts have been warning of a possible Chinese correction for weeks, reducing the element of surprise for investors abroad.

Original article posted here.

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