BT, 20-Apr-2007 China sizzle sends Asian stocks tumbling Red hot Q1 growth triggers China rate hike fears (SINGAPORE) For the second time in as many months, concerns over developments in China yesterday sparked a global equities sell-off. Regional markets were down sharply on worries that the Chinese government may raise interest rates to cool its rapidly growing economy. The selling also spread to the European markets, with the potential to continue into New York. Prices were down 4.7 per cent in China, 2.3 per cent in Hong Kong, 1.7 per cent in Japan and 2.1 per cent in Indonesia. Outside China, Singapore was the biggest loser among regional bourses. The Straits Times Index shed 109.13 points or 3.2 per cent to finish the day at 3,291.28 points.
'This shows the world is increasingly China-centric,' said Yang Sy Jian, head of research at UOB KayHian. 'If China goes into a down cycle, everyone will be hit by the deflationary tendencies. This includes property companies like CapitaLand which have assets there, as well as others with significant foreign direct investments in China.' Another analyst said: 'When the central bank is in a tightening mode, you don't want to take additional risks.' The tightening is not just in China, but also in Europe, Japan and possibly even the US. 'Current levels of the market are not in sync with the stance of the global central banks. I feel there is too much complacency in the market,' the analyst added. China said yesterday that its economy grew 11.1 per cent in the first quarter, compared with a 10.4 per cent annual rise in the fourth quarter of 2006. The March Consumer Price Index also rose at a higher-than-expected 3.3 per cent year on year, versus a forecast of 2.8 per cent. This sparked fears that the government may take tough measures to cool the economy further. Reuters quoted Chinese fund manager Xu Yinhui, at Guotai Junan Securities, as saying: 'Investors are worried the government may take serious steps to rein in the economy, such as an interest hike plus some administrative measures.'
So far the government has increased borrowing costs three times in 11 months to cool the economy and curb inflation. 'When the government stamps on the brakes, there is a risk that it may do it by too much,' said Mr Yang. This is the second time that the possibility of policy changes in China has sent chills down the spines of investors the world over. In late February, rumours of an introduction of capital gains tax for equities to cool the stock market caused the Chinese markets to plunge by nearly 9 per cent in one day. The selling became a global one and wiped out US$3.3 trillion from the value of global equities. But the offloading of shares lasted only one week. Since then, stock markets have gained back all the losses, and more. Gabriel Yap, a senior dealing director at DMG and Partners Securities, said yesterday's selldown is another excuse for investors to take profit as the Singapore market has risen 400 points in 1 1/2 months after the Feb 27 rout. 'Valuations of some Chinese stocks in China are a bit stretched for the short term, and new listings like Country Garden and Citic Bank are reflective of this,' he said. For example, despite its 4.7 per cent fall yesterday, China's benchmark CSI 300 Index, which tracks yuan-denominated shares listed on China's two exchanges, is still up a whopping 54 per cent so far this year. The STI is still up 10 per cent for the year to date. In the Singapore market yesterday, the transport, storage and communications sector was the biggest loser, with the index sagging 4 per cent. Multi-industry companies shed 3.8 per cent while property stocks were weaker by 3.3 per cent.
Surprisingly, the PrimePartners China Index is relatively resilient. It ended down by 2.1 per cent - the second least battered index among the relevant Singapore indices. The most steady sector was construction, with the index weakening by just 1.7 per cent. In China, meanwhile, the property sector took the brunt of the selling.
Mr Yang of UOB KayHian is of the opinion that stock prices are at a level where they are more vulnerable to sustained corrections, unlike previous occasions when any hiccups had turned out to be temporary. The risk-reward ratio is less favourable now, and investors have to be more nimble, he said. 'This is not to say that we are at the end of the bull market. Until we see some permanent negative developments, liquidity might still carry the STI to 4,000. Property stocks and banks, although they are already over-stretched, will also be the ones to carry the index higher.'
