China suffers stock market slump

First Posted:

JOE McDONALD AP Business Writer

BEIJING — International investors have been unnerved by the recent plunge in China’s stock market, fearing it signaled that a global recovery may be stalling, but many analysts say those worries are overblown.
The Shanghai market rallied a stunning 90 percent through early August, driven by what many analysts believe is a flood of money diverted into stocks from bank lending to support Beijing’s massive stimulus spending. That added to hopes abroad that China would help lift the world from its economic slump.
So when the benchmark Shanghai Composite Index tumbled as much as 20 percent over the last three weeks, investors took notice, driving down the price of commodities such as copper and soybeans and stock markets around the world.
The worry was that if investors in China — the strongest major economy through the slowdown — were dumping shares and losing confidence, then prospects for other markets and economies were dim.
Among investors in the U.S. and Europe, “there’s a growing belief that the Chinese stock market is a barometer of global growth,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
But those worries may be misguided. For one, falling Chinese stocks could simply mark a correction of a market that may have gotten ahead of the economy.
“China needs to come down, but don’t read too much into it,” said Ablin. “It’s not an indictment of the global economy, but an indictment of investors that piled in too fast.”
More important, China’s 19-year-old stock market is dominated by the communist government and reacts more strongly to policy changes than to economic fundamentals. Stock prices often are disconnected from the economy’s prospects.
“Historically, when the Chinese economy was doing well, the stock market could be bearish, and vice versa,” said Lu Zhengwei, senior economist for Industrial Bank in Shanghai.
The major reason behind the market’s drop this time was growing speculation that Beijing might tighten credit after bank lending soared in the first half of the year. At its highest point this year on Aug. 4, the Shanghai Composite was still down about 45 percent from its all-time peak above 6,100 in October 2007.

“It’s not an indictment of the global economy.”

CEO, Harris Private Bank, Chicago