Economy unshaken by stock tumble

JUST as nothing in China’s economic outlook justifies the slide in Shanghai stocks that sent global markets swooning, the slump in share prices is unlikely to make much of a difference to the world’s fourth-largest economy.

Economists pointed to plenty of reasons and rationalizations for Tuesday’s fall of nearly 9 percent — above all stretched valuations — but the health of the economy was not one of them.
To be sure, China’s central bank is likely to keep raising banks’ required reserves to mop up cash generated by an outsized external payments surplus that the government has identified as its biggest economic headache.

But runaway growth in investment, credit and money that raised fears of overheating last summer has slowed; retail sales have been robust; China’s export engine is purring on all cylinders and corporate profits have been rising briskly.

“The macro economy is exactly where the government wants it still,” said Paul Cavey, China economist at Macquarie Securities in Hong Kong. “So nothing really explains why it all crashed Tuesday.”

Economists at Lehman Brothers, like many others, regarded the meltdown as a market event, not an economic event, and said they were sticking to their forecast of 9.6 percent GDP growth in 2007.

“We judge that the plunge should have limited impact on the Chinese economy,” Mingchun Sun and Rob Subbaraman told clients.

Some foreign investors concluded from Shanghai’s slump that China’s economy, which has expanded by 10 percent or more for the past 4 years, must be heading for trouble.
Companies that have got rich feeding the China boom, such as miners, bore the brunt of the ensuing worldwide sell-off.

However, Stephen Green at Standard Chartered Bank in Shanghai saw no economic or corporate earnings news to trigger the fall.

As a result, he said, the effect on global growth would be “approximately zero.”

Talk of a third interest rate increase in 10 months and the introduction of a capital gains tax on equity investors were among the many rumors that accompanied Tuesday’s sell-off.

But Jonathan Anderson, chief Asia economist at UBS in Hong Kong, said in a note to clients that he saw no risk of aggressive steps aimed at curbing the stock market — especially after Tuesday’s tumble — or the economy.

“The overall macro situation looks stable, with well-behaved credit, inflation and real indicators — nothing that would warrant strong tightening,” he said.

Jun Ma with Deutsche Bank sounded a more bearish note on inflation, reiterating his view that rising price pressures in February and March would indeed trigger a rise in interest rates.
As such, the domestic stock market was at risk of falling another 15-20 percent, Ma said.

But he said this should be viewed as a healthy correction after a record-setting rise and would not have a significant impact on what he called the economy’s bullish fundamentals.
Anderson agreed. First, investors have not borrowed heavily to invest in stocks, so the impact on the financial system should be minimal.

Second, shares are only a small part of China’s financial wealth — most of it is held in bank deposits — so there should not be a “wealth effect” on consumer spending from either a rising or a falling market, Anderson said.

Cavey at Macquarie said spending by rich urban Chinese on things like cars could take a hit in the event of a prolonged market slump. But he noted that stocks were still sharply higher than a year ago — the Shanghai market leapt 130 percent in 2006 and has tripled in the past 20 months.

“This would have to continue day after day before you really had any big economic implications,” he said.

After all, Cavey added, the market had been rising almost vertically even though most indicators of the real economy over the past 6 months had been flat at best.

“The economy has played very differently from the market,” he said. “There’s not a strong relationship between the two.”