China Worries Worsen Asian Plunge

Stock markets in Asia continue to plummet on concerns about a U.S. recession and a slowdown in China's economic growth

by Bruce Einhorn

Investors react to stock indexes at a securities company on January 17, 2008 in Chongqing Municipality, China. Following a dive in US stocks, the Shanghai Composite Index closed with the largest one-day decline in six weeks. (Photo by China Photos/Getty Images)

Asia-Pacific markets last year were propped up by investor confidence that China and its hot economy would offset negative impact from any slowdown in the U.S. That Chinese life raft is now seriously leaking. Stock markets throughout Asia took a hammering on Jan. 21. And with the U.S. futures markets expecting a 500-point plunge in the Dow Jones industrial average when American markets reopen, the rout continued on Jan. 22 in Asia as worries about a recession in the U.S. and a slowdown in China continued to scare away investors.

In Japan, the Nikkei 225 ended the Jan. 22 session down 5.65%, to 12,573, as the index fell below 13,000 points for the first time since October, 2005. The steep fall came after a 3.86% dive the day before. Hong Kong's Hang Seng index followed its 5.5% drop on Jan. 21 with a fall of another 8.65% on Jan. 22, and Shanghai was down 7.2%, after a 5% drop a day earlier. South Korean shares fell sharply, with the benchmark Kospi index falling 4.4% after declining 2.95% the day before. "The contagion effects are spreading rapidly," says Ahn Young Hoe, chief investment officer at Seoul-based fund manager KTB Asset Management. "The epicenter is the U.S., but Japan and Europe have been hit and China doesn't appear to be free from the shock now."

In the process, the "decoupling" theory—that a sinocentric Asia would buoy the world while the U.S. sank into recession&mdashhas been shredded. Companies with China exposure are now taking the hit. Declines in Korean shares have been led by shipbuilding and steel shares that benefited the most last year from China's sizzling growth.

Samsung Heavy Industries, one of the country's largest shipbuilders, dropped 6% on Jan. 22 while Hyundai Steel, a leading Korean steelmaker, fell 6.5%. In Australia, shares fell again, continuing an uninterrupted two-week drop that has seen big declines in resources heavyweights such as BHP-Billiton (BHP), which had been riding high, thanks largely to growing demand from China. The Anglo-Australian giant's shares have dropped 22.8% so far this year.

Cooling Off at a Bad Time

As in other parts of Asia, investor worries about China start with questions about how many more billions of dollars banks such as Bank of China will need to write off because of bad bets on U.S. subprime securities (BusinessWeek.com, 1/16/08). But the fears extend far beyond the U.S. financial crisis to other issues. China may be cooling off at just the wrong moment for world economic growth. Beijing has been trying to slow down the Chinese economy, which last year grew at close to a 12% clip. To do that, the government has been letting the Chinese currency, the yuan, appreciate at a faster pace against the U.S. dollar. The government also has been raising reserve requirements for Chinese banks. Starting Jan. 25, the amount that banks need to keep on reserve with the People's Bank of China, China's central bank, will jump another 50 basis points to 15% of their total deposits.

At the same time, to combat inflation that's running at more than 6.9% in November, the government on Jan. 16 introduced price controls on food and liquefied petroleum gas. "We have already seen shortages of coal and fights over gas," says Garry Evans, Asia Pacific equities strategist at HSBC (HBC) in Hong Kong. "These problems will get exacerbated. Companies will cut back on production if they are making a loss on every unit."