The disconnect between China’s stock markets and those of the rest of the world was once something to be celebrated. With foreign participation restricted and large amounts of domestic cash looking for a home, the Shanghai Composite Index (SCI) has soared in the last two years regardless of whatever malaise gripped New York or London.
This trend appeared to come to an end in January. As anxiety grew about a possible US recession, economists started shaving points off their 2008 Asia growth predictions in anticipation of a sharp fall in exports to the West. On January 22, the SCI followed the lead of its regional neighbors and tanked.
“While China’s stock market is not that integrated with the rest of the world, the Chinese economy as a whole is extremely integrated,” said Fraser Howie, who co-authored a book on China’s stock markets. “If there was a large fall in the global markets, it wouldn’t be surprising to see China suffer too.”
However, there is a difference between integration and crippling dependency.
Jonathan Anderson, global emerging markets economist at investment bank UBS, expects China’s economic growth to fall below 10% this year from around 11% in 2007 largely due to a fall in exports. The hit won’t be as severe as in other Asian countries, though, because China’s export exposure as a proportion of the whole economy is comparatively low.
But Chinese stocks are not out of the woods yet. Corporate earnings rose more than 40% in 2007 and Anderson believes that gains from one-off stock market investments may have accounted for 15% of this. Therefore, a weaker market this year will detract from earnings growth, which will in turn undermine share value.
“Throughout 2007 anyone who had surplus cash – whether it was listed companies, parents of listed companies or government agencies – would have been putting it into the stock market,” added Howie.