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Chinese ‘sneeze’ rattles markets
LAST week’s unexpected drop in
China’s share markets have caused a tremor in exchanges around the
world and contributed to concerns that markets are entering a
phase of increased volatility after the strong growth in recent
years.
The Chinese market grew by an incredible 130% last year, fuelled
by more than a decade of strong economic growth and massive
inflows of foreign direct investment.
Most stock market punters would still be sitting on solid gains
after last Tuesday’s 9% plunge in the valuation of equities.
The Chinese Government itself had taken steps to cool down the
market as part of its overall efforts to keep inflation under
control so that economic growth would continue to be soundly
based.
By the weekend, the turmoil appeared to have quietened down but
most markets from Wall Street to European and Asian markets as
well as the Australian Stock Exchange and even the relatively
little Port Moresby Stock Exchange have felt the impact.
PNG’s biggest company, Lihir Gold, saw its shares yesterday plunge
by 21c to A$3.06 from its pre-China price of A$3.57 for an overall
loss of 51 cents in the past week.
The second largest, Oil Search, yesterday shed 18c to A$3.35 for
an overall loss of 40c in the past week.
Australia’s high-flying stocks were just as badly hit with News
Corp down A$1.95 during the week to A$29.70, BHP Billiton down
A$1.82 to A$27.12, while the Commonwealth Bank slid A$1.56 to
A$49.65.
Wall Street has reportedly shed more than US$800 billion as a
result of the slide in share prices.
In the current climate of uncertainty amid additional concerns
about domestic manufacturing output and slackening property
investments in the United States, it could take some months for
markets to recover lost ground.
But if some of the indicators continue to remain in negative
territory, it could be a real long grind before international
markets recover fully.
Some analysts are suggesting stock markets could fall by another
five to 10% over the next couple of months, but optimists believe
the latest falls have already produced a “buying opportunity”.
Many analysts are busy trying to discern which markets and what
stocks have better underlying values in terms of price earnings
and other ratios, but the situation is complicated by uncertainty
about commodity prices that remain at high levels.
On this basis, some analysts are suggesting that the ASX still
provides good value vis-a-vis US stocks, partly because they are
underwritten by gold and other commodities.
However, the former head of the US Federal Reserve, Alan
Greenspan, last week suggested that based on econometric models he
used to work with, the US share market could be undervalued by up
to 40%.
This bold call is based on expectations that projected earnings
from the US stock market should be close in value to US ten-year
government bonds, where the yield is around 4.5%.
Of course, all such logic would prove faulty if the US does enter
a recession, which only a minority of analysts believe is a
possibility.
Such an event could see a further slide in stock markets and it
could be two or more years before there is a substantial recovery.
For the moment, though, the US economy is still running strong.
But what is probably most interesting is the fact that this is the
first time that the China market has literally sneezed and caused
almost every one else to feel a bit of an affliction.
Unless there are repercussions from a slowing US economy, the
Chinese market is unlikely to come under too much additional
stress because of the rapid economic growth the country continues
to enjoy.
China’s investment rate remains very high at around 40% of GDP but
savings by the government, local corporations and households is
even stronger.
Asia has become a critical part of the global economy with China,
Japan and India accounting for more than 35% of world gross
domestic product.
Asia has in recent years, regained its role as the world’s fastest
growing region and contributes close to 50% of annual world
economic growth.
 
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