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Newly mighty markets

(China Daily)
Updated: 2007-03-01 07:08

Though Chinese stocks bounced back strongly yesterday, it is still too early to tell if their worst plunge in a decade on Tuesday is just a long-expected correction.

For the regulators it is never too early to dispel market rumors that fuel panicked trading.

The Shanghai Composite Index tumbled 8.8 percent on Tuesday, the deepest single-day fall since February 18, 1997.

After a 130-percent rise last year, a considerable correction has long been on the minds of most Chinese investors. Clearly, though, few had expected that it would come in such a radical way.

Yet, what makes the Tuesday fall of Chinese shares particularly noteworthy is the ostensible influence it exerted on global equity markets.

Because of the time zone factor, China's stock losses were followed by losses elsewhere, including Wall Street's worst drop since September 11, 2001.

In comparison with the growing influence of the Chinese economy in global markets, China's underdeveloped stock markets have never exercised a similar impact in the international arena.

Tuesday's sell-off in the Shanghai and Shenzhen stock markets does not indicate any fundamental change in the outlook for China's economy or account for any decisive cause behind stock falls elsewhere.

But it seems impossible now for investors around the world to continue to take China's stock market as a purely domestic affair. As the Chinese economy expands and integrates closely into the world economy, its rapidly evolving stock markets are set to become a must-read investment guide for overseas shareholders.

That also means additional requirements in regulating China's stock markets. Domestic regulators need to step up efforts to ensure more market transparency and standard information disclosure.

In fact, the exact cause of Tuesday's sudden fall in China's markets remains unclear, given the lack of any significant negative economic or corporate news.

The government's immediate denial of rumors such as a possible 20 percent capital gains tax on stock investments not only ended panic selling but triggered a strong rebound yesterday.

It is more than likely that market volatility will increase as the Chinese stock markets have rallied so long and so high. The regulators better be prepared for it.

(China Daily 03/01/2007 page10)