As financial markets across the globe brace for another week of
uncertainty triggered by the US subprime mortgage crisis, analysts
are confident that China, especially the mainland, will be able to
hold its own.
Experts are of the view that China may not be directly hit by
the crisis as a result of its strong economic fundamentals, limited
exposure to this particular variety of assets, and the mainland's
restricted linkage with the international financial system. But
they warn that if the subprime housing mortgage crisis snowballs
and results in a severe economic downturn in the West, Chinese
exports may be indirectly hurt in the longer term.
Subprime lending refers to loans to people who have poor credit
histories and low incomes. These high-risk housing mortgages thus
come at high interest rates. Over time, these mortgages have come
to be bundled into other forms of securities and sold in the global
credit markets.
The genesis
The current crisis began as subprime mortgage defaults began to
spiral as a result of higher interest rates and the bursting of the
US housing bubble. With the US Federal Reserve consistently raising
interest rates, borrowing costs there have risen from 1 percent to
5.25 percent in just two years. Increasing defaults and
foreclosures have taken down one US housing mortgage company after
another since late 2006.
But the wider problem is that banks, mostly in the US and
Europe, have bought much of these repackaged subprime debts, with
serial defaults and bankruptcies reducing the value of this asset
and making it difficult to resell it. At least five hedge funds
have blown up, including two of Bear Stearns and two by Australia's
Macquarie Bank Ltd. France's BNP Paribas has suspended three
investment funds while two Goldman Sachs Group hedge funds are also
reportedly suffering subprime-related losses.
In China, two of the Big Four banks have admitted to having been
affected by the subprime crisis. Though neither Bank of China nor
China Construction Bank has disclosed the extent of their exposure
to the subprime market, Bank of China has said its losses could be
"several million US dollars".
The US turmoil and fears of a global credit squeeze have been
dragging down regional stocks for weeks. Japan's Nikkei 225 Stock
Average has slid for four straight weeks while Hong Kong's Hang
Seng Index has had its biggest weekly loss in five months. South
Korea's Kospi has posted its biggest one-day loss in three years
and Australia's key index has hit the lowest mark in six years.
Only mainland stocks have so far stood firm. Drawing succor from
this resilience of A shares, analysts are confident that this
problem has very little chance of spilling over to the
mainland.
Jun Ma, China chief economist of Deutsche Bank, said: "There's
very little linkage between China and subprimes except through a
few financial institutions. Share prices have already reacted to
the subprime issue, I would say overreacted in some cases. The
impact is mainly sentimental."
Contagion
But what happens if Wall Street crashes? Because of its close
connection to the US financial market, won't Hong Kong be hit as
well in that case? And if Hong Kong catches cold, how long will it
be before Shanghai sneezes?
Chen Xingdong, chief economist of BNP Paribas Peregrine
Securities Ltd, admitted that Hong Kong may take its cue from Wall
Street but maintained Hong Kong might be hurt a little less this
time because of the mainland money circulating in its market.
"As for mainland investors, they are relatively inward-bound,
their money is still largely in Shanghai. Hong Kong and Shanghai
are still loosely related."
Ma goes a step further. According to him, A-share and H-share
markets react to different stimuli. "The mainland market is driven
by liquidity and company earnings. The H-share market is dominated
by foreign investors. If you look at recent share movements, you'll
see Shanghai and Hong Kong are, in fact, negatively
correlated."
Ricky Tam, chairman of Hong Kong Institution of Investors, also
points out this tendency of Hong Kong and Shanghai exchanges to
swing in opposite directions. "Despite the increasing contacts
between Hong Kong and Shanghai, the effect on the mainland will be
minimal. If Hong Kong keeps going down, Shanghai may of course be
eventually affected, but not that much."
Professor Raymond So of Chinese University of Hong Kong, like
BNP's Chen, believes even Hong Kong may not be affected that much.
"Though the international markets are more integrated than ever
before, markets are still ruled by fundamentals. Hong Kong
companies are making money and the economy is in good shape."
But So added a rider to his upbeat outlook. "If US companies
lose money in subprimes, they will go back to their investment
funds for redemptions. Fund managers will then have to sell their
stocks to raise the cash demand. When they start doing that, they
will sell international stocks as well. So even if Hong Kong or
Shanghai shares are fundamentally strong, their prices will start
falling."
Long-term worries
But more than a possible, eventual slide in share prices, So is
worried about the long-term impact on Chinese exports. "Subprime is
essentially an American crisis. But if the US economy is hurt,
American demand for foreign goods and services will slow down," he
said.
Chen also pointed out that more than 30 percent of Chinese
exports head for the US, and that's the real potential headache for
China as far as the subprime saga goes.
But Ma believes even that is not a big problem. "Chinese exports
have become less reliant on US. Europe is now a bigger market," he
said.
"We have calculated that a 6 percent slowdown in Chinese exports
may result in a 1 percentage point slowdown in Chinese GDP. But
even in the case of a bigger slowdown, China can exercise its
options to stimulate the economy."
(China Daily August 14, 2007)
