Global impact of latest China plunge more limited this time
MUMBAI, India (MarketWatch) -- After yet another Shanghai sell-off that was sparked by China's latest bid to bid cool off its overheated market, investors around the world seemed less rattled than they were in comparable instances in the past.
China suffered a severe plunge in its mainland stock market in late February and, to a lesser extent, had a few sharp pullbacks in a couple other sessions since then. Each of those down days led to turmoil in several other markets, from Mumbai to New York.
But the Shanghai Composite Index, which has climbed nearly 60 percent in this year alone, has rallied back over and over. Equally important, other world markets have performed well in the months since Chinese authorities began taking steps to soak up excess liquidity and other moves to discourage domestic investors from throwing their money into the nation's red-hot stock market. See Asia Markets report.
"The equities market in China is just a very, very small part of China's overall economy," said Tony Russell, a manager at Australia's ABN Amro Morgans.
Wednesday's 6.5% sell-off in China comes amid soaring valuations and strong liquidity flows as millions of retail investors, attracted by the prospect of making easy money, diverted their savings from low-yielding bank deposits into the stocks.
Official data released this week shows that the number of trading accounts in China has risen about 25% this year to 100 million, representing about 17% of its urban population. On Monday alone, investors opened 455,111 accounts, pushing the total number of such accounts over 100 million, underscoring the dominant role that mainland retail investors have in the local market.
To be sure, fund managers said that global funds have a significant enough presence in China to warrant minor redemption pressures back home, in case of a sharp correction.
"Given the flow of money globally, there may be a reaction in markets other than China as well," said I.V. Subramaniam, director at Quantum Asset Management Co. in Mumbai. "But I see this as a temporary phenomenon."
Subramaniam said that if international investors spur a sell-off in other markets such as India because of a correction in China, "other investors may take a contrarian call and support the market."
In the latest plunge in Shanghai stocks, markets were mixed elsewhere around Asia. Australia's All Ordinaries Index closed down 1.1%, and Japan's Nikkei 225 Index fell 0.5%. In Hong Kong, the Hang Seng Index lost 0.9% and the Sensex Index in Mumbai was off 0.7%.
The outlook was more downbeat, however, in London's market, where many top-tier issues of mining companies have been in rally mode thanks to China's commodities-centric boom.
Though even the London Stock Exchange, the benchmark FTSE 100 Index was down 0.8% in afternoon trading.
Several investment professionals said that the notion of China's stock market coming down to earth is unlikely to cast a shadow on their respective markets.
A leading reason is the insulation of China's stock markets.
"China's A share market is very ring-fenced from the rest of the world," said Garry Evans, a regional equity strategist with HSBC in Hong Kong. "Chinese investors have very little investment overseas and foreigners are limited (in their participation) to $10 billion."
Some analysts outside China pointed out that the country's economy, which is powered by the strength of its manufacturing industries, is much bigger than its stock markets.
"As long as the impact from the equities market doesn't spill over into the broader economy and didn't affect China's trading relationship with Australia, the markets in Australia shouldn't react much," said ABN Amro's Russell.
China is among the top three trading partners for Australia, he said.
Ken Yau, deputy research director at Core Pacific-Yamaichi in Hong Kong, said he was watching to see how the Chinese authorities' latest market-cooling measures would play.
The big test, he and others said, would come when Wall Street weighs in.
"However, the fall today was more because of hurt sentiment," he said. "I think that Hong Kong shares movement will depend more on the minutes of the (U.S. Federal Reserve) meeting this week."
Elsewhere in the region, participants are adopting a wait-and-watch approach to see the impact of China on some other global markets.
"The Australian market is very concerned about the reaction in U.S. tonight after what happened in China," said ABN Amro's Russell. "The impact in Australia would depend on what happens in China over the next few days."
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