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How will China’s markets recover?

Kai Ryssdal Feb 27, 2007

How will China’s markets recover?

Kai Ryssdal Feb 27, 2007

KAI RYSSDAL: As Johnson said, the news out of China overnight set the tone. One day after they drove the Shanghai Composite Index to yet another record high, investors sliced almost 8.8 percent off Chinese stocks.

Robert Hormats is vice chairman at Goldman Sachs International. Mr. Hormats, good to have you with us.

ROBERT HORMATS: Nice to be with you.

RYSSDAL: What do you think we have here? Is this just a slump, people are tired over there and they were looking for a break? Or is it something bigger?

HORMATS: I think the markets went up very, very quickly. They had a great run, and now people are perceiving the fact that perhaps they were overbought. Second, they see that the

governor of China wants to try to get a little of the speculative pressure out of the markets. A lot of people are borrowing from banks to buy stocks, the government wants to stop that or at least slow it done. And the government also wants to cool off the economy a little bit. Which is why it’s tightened interest rates and tightened up on bank reserves.

RYSSDAL: How much of this volatility in the stock market do you think is due to relatively inexperienced retail investors over there? Seeing the stock market going

great guns and piling in and out, sort of bailing out?

HORMATS: A lot of it. People do not have a lot of experience with volatility. A lot of people are going into the market for the first time. Many of them feel that they can borrow lots of money from the bank, buy stocks, stock will go up, then they sell the stock and repay the bank loan. It’s a case of, I think excessive leverage, excessive optimism. And also, perhaps the feeling that the Chinese government would let this run for a lot longer, but the Chinese government is concerned about a big asset bubble. They saw what happened in Japan in the 1980s when the bubble burst, and they do not want to see this happen again.

RYSSDAL: What’s your level of discomfort with the possible systemic ramifications of this today? Is slower demand in China . . . means slower growth here, which means slower worldwide economic growth?

HORMATS: It will have some negative impacts on the U.S. And we’ll see it primarily in companies that sell a lot to China. We’ll also, I believe, see it in commodity markets, because the Chinese are large

marginal investors of almost every major commodity. If their economy slows down, that will slow down demand for those things. But I believe that the government of China is going to do everything it can to avoid this decline of the stock market leading to a sharp decline in economic activity.

RYSSDAL: I was just checking the calendar. Do you think this could be sort of another Black Tuesday that we’re gonna remember for awhile?

HORMATS: I think we will remember it for awhile. But China in its essence is still a very strong economy. And I think if you look at this as an overdue . . . perhaps a long overdue market correction and an opportunity for investors with a middle and long-term perspective to buy, I don’t think it will last too long. But I do think a lot of the speculative frenzy — this irrational exuberance that a lot of investors have exhibited — does have to be wrung out of the market. So it’s a correction that many markets go through. For the Chinese, it’s a bit traumatic because they don’t have the record of experience that many of the other large economies do. But this will help their people to become more sophisticated investors and more cautious — although some will certainly lose a lot of money in the process.

RYSSDAL: Bob Hormats is the vice chairman at Goldman Sachs International. Mr. Hormats, thanks a lot for your time.

HORMATS: My pleasure, nice to be with you today.

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