Dragon, tigers slain by inflation scourge
Asian stock markets are witnessing one of their biggest declines but further slides at some are unthinkable. By Umesh Pandey
As China continues to rack up gold medals one after another and tops the table in the 2008 Olympics, its equity markets are also scoring a title, albeit one much dreaded by their investors - the title of the worst-performing markets in the region.
The widely followed Shanghai SE CI index is down more than 50% year-to-date, followed closely by the Shenzhen index, amid fears that the economy will start to slow down after the month-long Olympic euphoria is over.
The major China stock indices hit a new 19-month low and are continuing their slide amid slowing growth, rising inflation and cost pressures.
The Shanghai Composite Index closed at 2,450.61 points yesterday, after starting the year off at 5,272.81 points on Jan 2.
Indeed, China's Olympic miracle is being eclipsed by the worries that macroeconomic trends would hit corporate profit growth in the second half of 2008, Reuters reported recently.
The government announced that annual producer price inflation rose sharply to 10% in July from 8.8% in June. Economists polled by Reuters had given a median forecast for a 9.1% rise.
Producer price inflation is now well above consumer price inflation, pressuring companies' profit margins and threatening to cause a rebound of consumer price inflation later this year.
"Producers' profit margins are being squeezed sharply. And even though tough market competition will delay the pass-through to retail prices, it will happen eventually," Reuters quoted Xing Zhiqiang, an economist at China International Capital Corp, as saying.
"Potential inflationary pressures are building in the pipeline."
China is not alone in its quest to head for the title of "worst-performing" stock market in the world as countries such as Vietnam are vying for the title as well.
Other countries such as Philippines, Indonesia and even Thailand are looking for a similar position as markets in this region have also shown a remarkable slowdown.
The Indonesia Composite Index has dropped by around 20% so far this year after being one of the top three best-performing markets in 2007. The sharp decline has been blamed on the ongoing crisis in the United States market where the credit crunch has started to take a global toll. In terms of market capitalisation decline, the Indonesian market has ranked seventh on the list of worst performers, declining 14.23% between January and July this year to US$175.1 billion.
But economist are sceptical about the continued decline in the markets, saying that the worst for some of these markets may be over.
In China, not all recent economic data have been negative. Xinhua news agency, quoting the customs administration, reported yesterday that China's July trade surplus was much larger than analysts had forecast, with both exports and imports outpacing expectations. Exports grew 26.9% from a year ago against a median forecast of 18.1%. Unfortunately, the focus of the investors has been only on the negatives ones.
"The Olympics factor has now disappeared. The government has taken no concrete policies to bolster the market, so disappointed investors are voting with their feet," said Huang Yan, fund manager at Guotai Fund Management.
"Investors are so overwhelmed by pessimism that they're becoming indifferent to market-friendly rhetoric" by Chinese regulators trying to restore confidence, he added.
Reuters says the recent decline leaves the market index 60% below last October's record peak. It soared sixfold between June 2005 and last October in one of history's biggest equity bull runs.
Some fund managers are talking privately of the possibility of the index sliding to 2,200, but few are willing to forecast a floor. The earlier projection of a "strong" support, at 2,500 points was breached last week and has further spooked investors.