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China takes plunge, Wall Street keeps cool

Bob Moon Apr 19, 2007

China takes plunge, Wall Street keeps cool

Bob Moon Apr 19, 2007

BOB MOON: It takes an expert to sort through what happened with Chinese stock prices today, and why investors here apparently are over the big fears they had when the Shanghai Composite Index plunged nearly 9 percent in late February.ASIAN markets were certainly spooked today when Beijing reported China’s economy expanded about 11 percent in the year’s first quarter — and that inflation is the highest in two years.The Shanghai Index plunged 4.5 percent today. But unlike the last time, Wall Street didn’t panic.

Joining us to talk about it all is Eurasia Group director Jason Kindopp.Welcome.

JASON KINDOPP: Thanks for having me.

MOON: How significant is what happened today in relative terms?

KINDOPP: I think, relatively speaking, today’s sell-off is entirely warranted. It’s interesting that markets will pay attention only during the sell-offs, but . . . I don’t think it was very significant, considering that China’s econ . . . market has risen almost 150 percent in the last year and a half. And since the 9 percent sell-off six weeks ago, the market has then resumed its upward trend and gone up 20 percent. So, these are pretty small sell-offs punctuating a continued upward rise in China’s markets, that many believe is rising too fast. Which is the real cause for concern.

MOON: And perhaps more level heads prevailed, looking at that on Wall Street.

KINDOPP: That’s right. I think everyone agrees that China’s stock market is probably overdue for a correction. At least, you know, some sort of pull-back or consolidation after its dramatic rise over the last year and a half.

MOON: What kind of action from the Chinese would it take to really set the markets off again?

KINDOPP: I think if Beijing came out with some very, very stern tightening measures — and by that I don’t mean another

27 base point interest rate hike, which has been quite commonplace now — but something that really showed they were serious about slowing growth. New curbs on lending and commercial banks, a new campaign to slow investment growth. Some very strong language from the top leadership. Those kinds of signals would be concerning to markets around the world.

MOON: And how likely is it that we might see that?

KINDOPP: Not very. Although there is mounting concern in Beijing about China’s own stock market bubble. And we are expecting them to take some measures to try to cool market sentiment in China. Although it’s very delicate, because the markets are so high right now — and they have such poor tools to deal with it, that they’re gonna have to tread very carefully to avoid triggering a major sell-off.

MOON: Let me bring you back to the Shanghai Index briefly. What are the chances that the Shanghai Index is gonna become Asia’s premiere marketplace with all the volatility that we’re seeing?

KINDOPP: I think that’s a long way off. In many respects, the Shanghai market’s playing catch-up after languishing for the first four years or so of the emerging market bull-run. It’s only been within the last year and a half or so that Shanghai’s market has begun to rise as well. And with so much liquidity in China’s financial system, there are concerns about a bubble emerging. But the premiere market prospects rely more on the quality of the firms listed, the transparency of the markets themselves. Well-developed regulations, regulatory institutions, all of those are decades away in China’s case.

MOON: And yet, we have this paradox of nobody really taking them seriously, but everybody taking them seriously.

KINDOPP: Yeah, well that’s true. I mean, China’s been such a major driver of global growth over the last couple of years with its economy growing at around 10 percent, that any signs that China’s economy is wavering will send ripple effects throughout the global markets.

MOON: Jason Kindopp of Eurasia Group. Thank you for joining us.

KINDOPP: Thanks for having me.

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