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Direct hit to market unlikely

By Zhou Yan (China Daily)
Updated: 2008-09-25 10:18

Investors are reeling after the main stock index took a hit from the US financial turmoil last week to fall below 2000 points for the first time in 22 months.

But analysts said the Wall Street crisis might not have much direct impact on the mainland equity market given its limited investment exposure to global capital markets.

The mainland equity market fell sharply last Tuesday in response to carnage on Wall Street, rebounding later in the week when the US government unveiled its rescue plan.

There is some correlation between the recent fall and rise on the Chinese stock market and the unfolding US crisis as world economies become more interdependent, Liu Jing, a professor at the Cheung Kong Graduate School of Business, said.

But external turmoil only sparks psychological panic since the domestic market has limited global exposure, he said. "The asymmetry between demand and supply in financing and investing is mostly to blame for the turbulence," Liu said.

China's benchmark index has been on a downward slide since it hit its all-time high of 6124 points last October, but it is still independent of its global counterparts, analysts said.

The stock market woes started before the current crisis hit, they said. The benchmark Shanghai Composite Index has shed about 70 percent since last year.

Wu Xiaoling, vice-chairwoman of the Financial and Economic Committee of the National People's Congress, made similar remarks at a forum in Shanghai recently. Wu said the US financial volatility would not induce a slowdown in China's real economy, but would have a psychological impact on the financial market.

Although tight regulation has cushioned external risk passed down to the Chinese stock market, Liu said the authorities must try to ease conditions to support development of a multi-faceted capital market.

"An overly tight supervision system would force us to passively bear risks from foreign markets, instead of preventing the market from being hit by the external crisis," he said.

However, global financial woes are inevitably eroding the margins of listed companies in some sectors, and that could stifle the recovery of the mainland stock market and darken its outlook in the long run, market watchers said.

"Manufacturers focusing on exporting low value-added products are likely to experience the biggest impact from the global financial crisis," Raymond Tsang, partner at Oliver Wyman, a New York-based management consulting firm, said.

Tsang said the combined effect of renminbi appreciation, climbing energy and labor costs and weakened global demand would put many less efficient manufacturers in a tough position.

Many small companies, mainly listed on the Shenzhen Stock Exchange, recorded lower sales in the first half due to shrinking overseas demand arising from the credit crisis.

A total of 268 small caps posted 298 million yuan in losses for the first half, while they turned 8.51 billion yuan in profits in the same period last year.

For the large caps, like banking and financial companies, the direct impact is likely to come from a lack of confidence in the market and greater uncertainties and instability globally, Tsang said.

But listed companies with adequate capital to fund their growth will be less affected by capital market volatility, he said.