Bourse Blowout Shouldn't Brake China

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"There's no way global money managers will pull their investment en masse out of China in favor of other emerging markets," says Chanik Park, Seoul-based strategist at brokerage Morgan Stanley (MS).

True, there were some global companies that were directly hit by the China sell-off, especially ones that trade heavily with China. The mainland's two-way trade with the rest of the world hit $1.76 trillion in 2006, while its global trade surplus shot up 74% to an all-time record high of $177 billion, and a number of economists see it in the $230 billion range next year. The market turmoil did hit global mining stocks hard, for instance (see BusinessWeek.com, 2/27/07, "Chinese Stock Dive Buries Mining Stocks").

In Australia, home to mining and mineral giants such as BHP Billiton (BHP) and Rio Tinto (RTP), the stock market in Sydney finished down 2.6%. But analysts are confident that the outlook for global growth is still pretty robust, and that is good news for the kind of base metals like copper, nickel, bauxite (for aluminum), and zinc that the country supplies to China and other economies. "The market is confident that global growth hasn't capitulated," says Justin Gallagher, head of sales and trading at ABN Amro(ABN) in Sydney.

Good Fundamentals

Feeding China's industrial machines takes an awesome amount of materials—and mainland demand has lifted corporate earnings of exporters from Australia to Brazil. The mainland consumes about 20% of global aluminum and copper, some 30% of steel, iron ore, and coal, and 45% of cement produced each year.

Unless some unexpected development trips up the robust corporate earnings outlook—or China's overall economy—plenty of analysts think the markets in Shanghai and Shenzhen (still up 7.6% and 34%, respectively, on the year) could achieve double digit returns in 2007. "The fundamentals of the Chinese economy are still fine and I don't think the market will continue to drop substantially," says Chun Chang, professor of finance at China Europe International Business School in Shanghai and executive editor of the China Economic Review.

In a global economy currently full of big uncertainties over political instability in the Middle East, oil prices, and the impact of a housing market correction in the U.S., the prospect of trouble in China was bound to spook global investors.

Viewed rationally, there is little evidence the market turmoil in Shanghai and Shenzhen will do any real damage to the Chinese economy. Then again, stock markets can be anything but rational.

With Frederik Balfour in Hong Kong, Dexter Roberts in Beijing, Moon Ihlwan in Seoul and Bruce Einhorn in Melbourne