Chinese 'Black Tuesday'

Chinese 'Black Tuesday'
Clampdown triggers worldwide tumble

Alfredo Ascanio (askain)

Published 2007-03-05 08:49 (KST)

Massive sell-offs spread domino-style last week between the two great stock exchanges, New York's "Big Board" (NYSE) and the Shanghai exchange in China (SSE). The loss of 9 percent of market value in Shanghai and over $830 billion in the U.S. signaled nothing less than a global rout (these losses would be realized only when the underlying securities are sold).

Speculative buying on "margin," i.e., with borrowed money, along with possibly illegal offerings, prompted the Chinese government to authorize an investigative task force on Tuesday in an atmosphere reminiscent of October, 1929, on Wall Street, when the initial panic on Monday, Oct. 21, was followed by a mid-week rally before the bottom fell out on the following "Black Tuesday."

In 2006 the SSE saw a massive increase in trading volume, the benchmark index rising by 130 percent over the year and by 4 percent in January alone, feeding the Chinese government's suspicions about illegal offerings inflating a speculative bubble.

Chinese monetary policy has increased the involvement of banks in the economy to control the amount of cash in circulation, which has been partly responsible for an inflation rate exceeding 5 percent. Rapid consumer inflation has underlined concerns that the Chinese economy is overheating.

Chinese foreign policy has been bedeviled by problems with Iran and Afghanistan and the war in Iraq, which has also disturbed the Wall Street-Shanghai connection.

Optimistic prognoses of the Chinese economy have also been issued by analysts like Johanna Melka of Ixis CIB, who is sure that these stock exchange problems are fleeting and that the country has a good handle on its economy.

Malaysian analyst S. Sharath thinks that China intends to cool its economy by taxing capital gains.

Long-term capital investors exercise prudence and for that reason temporarily shy away from trading when the market behaves less than transparently, signaling greater risk, as at present.

What happens in Shanghai registers decisions made in Beijing and is transmitted to Hong Kong and even the special region of Macao.

In 1997 China withstood the Asian financial crisis and losses on the Hong Kong exchange, the same year the government refused to devalue its currency, the Yuan, and despite 12 million urban and 100 million rural unemployed in 1999.

The Chinese model inherited from Hu Jintao and Jiang Zemin reflects the privatization of the financial industry in the service of national construction.

After China gained entry in 2002 to the World Trade Organization (WTO) multinationals like Volkswagen, AOL Time Warner, Morgan Stanley, Wal-Mart and Fiat began to play a leading role in the annual growth of the Chinese economy. For example, China's GDP and income rose by 8.2 percent during 1980-2003.

"China's entry into the WTO will affect the world market. China is not just another country participating in the world market but rather the biggest in terms of population and the most dynamic in terms of growth and trade, as well as foreign reserve (holdings)," said Enrique Dussel Peters in Globalalternative.org.

In addition China has made innovative investments to promote industrial development by selling its islands in the province of Canton.

In Nov. 2004 China signed a commercial agreement with 10 nations in Southeast Asia as part of a free-trade zone.

China has already withstood many economic and financial crises, including foreign policy standoffs with the U.S. and other world powers.

China is an experienced negotiator, whose administration has shown itself to be efficient over the long term in the controls it has implemented and the opportune decisions it has made.
©2007 OhmyNews

Other articles by reporter Alfredo Ascanio
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