By Yi Xianrong (China Daily)
Updated: 2007-03-06 07:13

Just a week ago, the Chinese stock markets plummeted. The Shanghai composite index plunged nearly 9 percent and the Shenzhen index dropped 8.5 percent. This was followed by drops in markets globally.

In Asia, the Singapore index wound down 2.29 percent and the Nikkei in Tokyo slid by 0.5 percent.

In Europe, the British FT index plummeted by 2.2 percent, Germany's Dax dropped 2 percent and Cac in France went down by 2.6 percent.

In the United States, the New York Stock Exchange saw the steepest drop since the September 11, 2001 terror attacks. The NASDAQ, Dow Jones and Standard & Poors all plunged more than 3 percent.

Latin American and African stock markets were not spared.

Many analysts attributed the worldwide shocks to the Chinese stock market's influence on the international market. Some believe the Shanghai stock market slump sent shock waves to the world stock markets, a harbinger of dramatic financial changes. Others argue that the February 27 "Black Tuesday" marked the beginning of China's becoming a world monetary center.

As a matter of fact, the sharp one-day decline in China's stock market was purely an accidental event, in the opinion of this author. Even if this kind of incident happens again, it does not support the argument that the Chinese stock market holds a major place among world markets. China's present economic strength and the ranking of its stock market indicate that the country is far from being a world financial center.

However, I believe that the impact of the Chinese mainland yuan-denominated A shares on the global stock markets is a manifestation of financial globalization.

In the context of financial globalization, economic tumult in any small country could greatly impact the global financial market, much more so with economic events in such a big economic player as China.

Moreover, information is now transmitted through the Internet and telecommunications so rapidly that the shifts and changes in the financial market of one country are known virtually instantly around the world.

More important, the world's major investment banks have extended their tentacles to all corners of the global financial market. As a result, information about any insignificant changes in a local financial market is instantly transmitted worldwide through the channels of these giant players.

Most important, these giants are manipulating the financial markets throughout the world in one way or another.

Under such circumstances, information about any economic event in a local financial market is bound to be spread worldwide instantly.

Today's international financial market is guided by these financial heavyweights in virtually every way, ranging from investment ideas and investment tools to investment modes and channels. Investors' profiting from stock values declining or rising by short selling and going long on the international market are all influenced by their actions.

For example, when these major players went long on bulk goods a few years ago, the prices of bulk goods kept rising. When they went long on petroleum, rounds of oil price hikes were touched off. They reaped fat profits from both selling short and going long.

In view of this, taking advantage of any chance to create shocks across the market is a natural option. If we approach the events on the international financial market from this perspective, the drop of A-share prices actually had insignificant influence on global stock market fluctuations.

The plummeting of the US stock market on February 27 should not be blamed on Chinese factors. Instead, the stock market drop was an expression of poor economic indicators in the United States.

For example, orders for durable goods in January dropped by 7.8 percent, much more than expected, according to statistics released by the US Commerce Department.

Also, Alan Greenspan, former chairman of the Federal Reserve, warned that the US economy could be caught in stagnation by the end of this year. Under such circumstances, international speculators are happy to use this information to make sure that the strong US stock market slides.

In addition, stock prices on the markets of many countries and regions have been rising over the last year. Take Hong Kong. The Hang Seng Index rose 5,000 points in 2006, or 30 percent, over the previous year. With these factors, readjustment could happen any moment. So, it was not so much that the plummeting of Chinese mainland stocks caused the drop of the Hong Kong stock market as that Hong Kong made a downward readjustment itself, merely making use of the changes in the mainland markets.

We should treat the fluctuations on the global stock markets, seemingly triggered by the slump of A shares, not as something shocking. It is quite normal for prices to fluctuate.

We should not overestimate the Chinese A-share market's influence on the global market.

The author is a researcher with the Institute of Finance and Banking at the Chinese Academy of Social Sciences

(China Daily 03/06/2007 page9)