Stocks extend slide but some say panic over China overblown

An investor monitoring stock data on an electronic board at a securities brokerage house in Beijing yesterday. China reduced interest rates and the required reserve ratio yesterday in a move that analysts believe may help to halt the downtrend in the
An investor monitoring stock data on an electronic board at a securities brokerage house in Beijing yesterday. China reduced interest rates and the required reserve ratio yesterday in a move that analysts believe may help to halt the downtrend in the equity markets.PHOTO: EUROPEAN PRESSPHOTO AGENCY

Chinese stocks tumbled again yesterday to extend the steepest rout over four days since 1996, but analysts say the turmoil does not necessarily reflect the broader condition of the world's No. 2 economy.

Neither does the slump justify fears of a major global downturn, they added. While further stock- market bloodletting may be inevitable, the analysts say panic about China is overblown as large parts of its economy are still looking strong.

And China's move to cut interest rates and the required reserve ratio (RRR) yesterday is a move which may help halt equity market slide.

"Simultaneous interest rate and RRR moves are unusual - a sign that policymakers want to deliver a strong message," Capital Economics chief Asia economist Mark Williams wrote in a report yesterday.

"The move may halt the market slide but we suspect the primary motivation is to shore up confidence in the state of the wider economy."

The Shanghai Composite Index has sunk 15 per cent over the past two days, extending a US$4.5 trillion (S$6.3 trillion) rout since mid-June that has shaken confidence among equity investors.

Asian stocks followed suit before recovering yesterday, while global equities took a battering overnight.

But the recent slump has simply taken the Shanghai Composite Index back to where it was earlier in the year, analysts say.

The weak manufacturing index reading last week was just a reflection of the nation's weak economic fundamentals this past quarter, and even though growth remains sluggish, it was not weak enough to justify fears of a "hard landing".

"The Shanghai Composite could fall all the way back to its long-term support level just above 2,000," BMI Research said in its report. "Instead, we will most likely see a series of aggressive corrections, followed by relief rallies, followed by further declines."

Sceptics have criticised the faltering growth and China's response to it, but industry bigwigs, as well as some Western leaders, have voiced faith in the China growth story.

"I continue to believe that China represents an unprecedented opportunity over the long term," said Apple Inc chief executive Tim Cook on Monday, in response to queries on the sharp drop in Apple shares amid the market upheaval in China and around the world.

"Obviously I can't predict the future, but our performance so far this quarter is reassuring," he said.

Apple stocks had plummeted before Mr Cook's statement, falling 12 per cent in Monday morning trade before swinging back to positive territory and ending 2.5 per cent lower at US$103.12.

In Europe, German business confidence also climbed to 108.3 in August from 108 in July, as companies brushed off concerns that China's slowdown will drag on the nation's economic growth. Economy Minister Sigmar Gabriel also played down the risks to Germany, while French and Spanish leaders brushed off China's volatility saying it won't have serious effects on local markets.

Analysts' predictions that the Chinese authorities are far from waving the white flag came true when the authorities loosened interest and reserve rates after seeming to sit on their hands until yesterday.

The central bank linked the rate cut to low inflation and did not mention the stock market, but analysts said it was aimed at shoring up economic fundamentals.

"This move was triggered by concerns about negative sentiment following the equity rout rather than any new as yet unpublished information pointing to a sudden drop-off in economic growth," Mr Williams of Capital Economics wrote. "It should add to the tailwinds supporting economic growth in the second half of the year."

A version of this article appeared in the print edition of The Straits Times on August 26, 2015, with the headline 'Stocks extend slide but some say panic over China overblown'. Print Edition | Subscribe