China shares plunge leads to global market selldown Feb 28, 2007

GLOBAL stocks tumbled sharply yesterday, sparked by a near 9 per cent plunge in Shanghai's benchmark stock index - its largest single-day fall in a decade.

The epicentres of the selldown were the Shanghai and Shenzhen stock exchanges, where the benchmark indices sank 8.8 per cent and 8.5 per cent, respectively, over rumours of fresh curbs on investing by the Chinese government.

It was the biggest drop in percentage terms since an 8.9 per cent fall on Feb 18, 1997, triggered by rumours that then-paramount leader Deng Xiaoping had died, a day before he actually did.

In New York, the Dow Jones Industrial Average was down 175 points, or 1.4 per cent, at press time, fed by growing concerns about slowing economies in the United States and China.

Worries that US stocks are also about to embark on a major correction contributed to the fall.

In Asia, the worst hit markets outside of China were Kuala Lumpur, Singapore and Hong Kong.

After a dizzying run-up in recent weeks, Singapore stocks suffered their biggest dive in nine months yesterday.

The Straits Times Index (STI) plunged by 75.9 points, or 2.3 per cent, to end at 3,232,02 - its biggest fall since May 15. At one point, the index was down 90 points in very heavy trading.

Hong Kong's Hang Seng Index fell 1.8 per cent, while Malaysia's Kuala Lumpur Composite Index dropped 2.8 per cent.

Following the rout in Asia, European markets opened weaker with key indices in London, Frankfurt and Amsterdam falling by more than 2 per cent.

Dealers said the catalyst for the panic selling yesterday was speculation of an imminent round of austerity measures by the Chinese government to cool its red-hot economy.

In Shanghai, local funds were said to have sold amid fears that Beijing will crack down hard on rampant speculative investing next week.

Reports are surfacing of housewives punting on stocks and families pledging their houses for loans to strike it rich on the markets. The Shanghai market was up 13 per cent in the previous six sessions.

While no new policies were announced yesterday, investors nonetheless thought it was safer to sell their shares to lock in gains rather than deal with the current uncertainty, said an analyst.

Markets were also spooked by renewed concerns about the pace of US economic growth, stock valuation worries and rising oil prices.

At home, market watchers said the correction simply represents a return to realistic levels for prices of blue chips that have risen to record levels.

'The correction is healthy as it separates the investors from the speculators,' said JP Morgan Private Bank's senior portfolio manager, Mr Elan Cohen, although he acknowledged that investors were getting more cautious.

'If you look at the bond market, treasury yields are falling, which means investors are taking a more defensive posture. Gold prices are also going up because people are buying gold, as it is seen as a hedge against uncertainty.'

Market watchers said another factor in the sell-off was a warning issued on Monday by former Federal Reserve chairman Alan Greenspan about a possible US recession by the end of this year.

'Greenspan's remarks could have been interpreted as a wake-up call by Asian markets enjoying one new peak after another, of the urgent need to consolidate the huge share-price appreciation, especially this year,' said Fraser Securities' head of research, Mr Najeeb Jarhom.

'The market needs a breather to enable investors to digest the numerous earnings results and weigh the earnings prospects this year.'

Indeed, rising oil prices and fears of an abrupt slowdown in the US - due to a weak greenback or a cooling housing market - were several reasons for investors to lock in gains yesterday.

Among the worst losers were DBS Bank, losing 50 cents to $22.50, and United Overseas Bank (UOB), which shed 50 cents to $21.

Still, despite lingering caution after the correction, UOB treasury economist Thomas Lam reiterated that investors are still taking tremendous risks in global financial markets.

'Investors appear to be quite stretched in terms of risk taking.'