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The View From Asia

Shake, tumble and fall

The recent turmoil in China's stock markets rattled investor confidence, with the sell-off wiping out nearly US$4 trillion (S$5.5 trillion) in market value before the government took steps to calm the markets. We reproduce extracts from commentaries on the issue from newspapers in the ANN network.

Market rout offers valuable lessons

Ed Chang

China Daily

If a sports game is affected by a sudden downpour, it is the referee's job to announce a halt to the competition.

By the same token, no one can really dispute the fact that if the Chinese government sees the country's stock market as being in a disastrous moment, it will have to react according to its own judgment.

It would be a mistake to imagine that the interventionist policies will stay for good.

Instead, what can, and indeed should, stay are the lessons that regulatory officials and investors can learn from the wild volatility.

Any market that rises too fast would be seen as a bubble suspect.


Amid all the fears, it is important to note that the steep fall in the China stock market simply took it back to levels of only four months ago, and that it’s still 80 per cent higher than where it was a year ago. PHOTO: EUROPEAN PRESSPHOTO AGENCY

A stock market of massive small investors and small funds, and only a few companies with a clear market niche and core competency, has an even stronger tendency of this kind.

The regulatory regime of such a market will have to make sure that:

•Highly leveraged investments, by both institutions and individuals, are subject to a stricter limit and perhaps more detailed rules.

•Financial futures had better be cordoned off to small individual punters and welfare funds.

•More investment instruments are available.

There is a powerful fund that, with access to the central treasury, can be used by the Premier's office to interfere with the market in a critical situation.

And the regulatory body is composed of people with a good sense of responsibility.


Could China be ‘turning Japanese’?

Djamester Simarmata

The Jakarta Post

The economic growth of China is among the world's spectacular phenomena.

China outstrips Japan's and South Korea's rapid economic growth rates, sometimes by double digits.

The two predecessors fell into crises: Japan in 1990 and South Korea in 1998. But, now, could China be "turning Japanese"?

The recent 14 per cent decline of stock prices in Shanghai is quite worrying.

As with Japan, China's economic downturn has been attributed to the US sub-prime mortgage crisis, originating from a housing market bubble.

Claude Borio of the Bank for International Settlements is convinced that the crisis will be long and severe if its origin is in the property sector.

Japan is said to be a role model for China, despite the countries' different political systems. Likewise, South Korea follows Japan's strategy. If South Korea has also fallen into crisis, will China share the same fate?

One of the similarities of the three countries is the significant role played by the asset markets.

The International Monetary Fund shows that within the 2004-2009 period, prices of houses in 35 cities doubled, while in 70 other cities the prices rose by 35 per cent.

In China, the socialist model of housing was completely abolished in 1998. Additionally, the real estate sector was turned into a new engine of economic growth. Then China's central bank lowered the mortgage interest rate five times between 1998 and 2002. The year 2003 was a milestone, with a booming real estate sector.

The growth driver of China's economy before 2003 was the non-property sector which had an average growth rate of 10 per cent. But now most of the discussions are concentrated on the real estate sector.

Some indications are worrying, because the debt level in China stands at 282 per cent of GDP.

However, 180 per cent of that figure is from the private sector.

Before 2012, the private debt ratio was higher in the US, but now it is higher in China.

In China, household debt has risen from $1 trillion in 2007 to $3.8 trillion in 2014. Nearly half of China's debt is related to real estate.

High private sector debt could reduce household expenditure, lowering potential aggregate consumption. Expert opinions on the future of China's economy are at odds with each other.

Nonetheless, in many respects, the development of China's economy is an imitation of Japan's model, which in 1990 fell into a double crash.

Analogically, there could be a potential crash in the Chinese asset market. The important point is to prepare for the two potential events, crisis and no-crisis.


Should others worry?

Cielito F. Habito

Philippine Daily Inquirer

For some, China's stock market crash is the beginning of the end of the China economic juggernaut, or what analysts have constantly predicted to be its inevitable hard landing, even doom.

For others, it's just another bump on the road as China seeks new directions for its economy, as slowing demand from faltering Western economies has taken the steam out of its export-driven growth engine.

It's important to note that the steep fall in the China stock market simply took it back to levels that prevailed only four months ago, and that it's still 80 per cent higher than where it was a year ago.

It was the Chinese government itself that induced the recent extraordinary market surge - by easing restrictions on stock market investments using borrowed money.

As a result, an unusually high proportion of stock market trades in China is financed by debt.

Also unique is the preponderance of small investors in the stock market, many of whom reportedly don't even have a high school education - an estimated 90 million people accounting for 85 per cent of trades.

Elsewhere, it is large institutional investors who take the lion's share.

The stock market crash is thus hurting large numbers of Chinese, and analysts believe that the Communist Party is most worried about the possible political backlash from all this, and not so much the financial and economic implications.

Will ordinary Filipinos be hurt by the Chinese crisis?

The 2008-2009 global financial crisis hardly affected us; there's little reason why things should be much different this time around.

If anything, I'd say it's the potential political consequences of these events, rather than direct financial effects, that would ultimately be our greater worry.

ASIA NEWS NETWORK

•• The View From Asia is a weekly compilation of articles from The Straits Times' media partner Asia News Network, a grouping of 22 newspapers. For more, see www.asianewsnet.net

A version of this article appeared in the print edition of The Straits Times on July 18, 2015, with the headline 'Shake, tumble and fall'. Print Edition | Subscribe