Bailout rejection to hit investor confidence in China

By Xin Zhiming (China Daily)
Updated: 2008-09-30 23:42

US lawmakers' rejection of the $700 billion rescue plan makes the prospects for the US and world financial markets more uncertain and may affect investor confidence in China's stock market, analysts warned.

In the worst scenario, the bailout failure would cause a major decline in US and global financial markets and ultimately affect the real economy.

Analysts said it will cut demand for China’s exports, hit its tourism industry and impact on the overall Chinese economy.

A trader stands outside the New York Stock Exchange September 29, 2008. The Dow Jones industrial average Monday posted its largest point decline ever while the benchmark S&P 500 had its worst day since the 1987 crisis with an 8.8 percent drop. [Agencies]

China needs to make more efforts to boost domestic demand to buffer the impact of reduced external demand.

After the US rescue plan was rejected, dismayed investors sent the Dow Jones industrials plunging 777 points, its biggest ever single-day decline and more than the loss after the Sept 11, 2001 terror attacks.

The mainland stock market escaped from the impact of the US market slump due to its closure for the seven-day National Day holiday, but Asia-Pacific stock markets opened in a sea of red yesterday, reflecting jitters that US woes would spill over globally.

But the bad news may still hit the mainland market when it resumes trading next week. Considering the fact that it rose more than 25 percent after the government issued a slew of favorable policies since late last month, a post-holiday correction is possible, analysts said.

Economist Joseph Stiglitz warned that without any bailout, the US financial market would implode, bringing the world economy into a serious recession.

If that happened, China would not escape unscathed. Apart from losses incurred from its direct holdings of US debts and securities, its real overall economy would also suffer, said Sun Lijian, an economist with Shanghai’s Fudan University.

Exports would slow as demand for Chinese products declined, he said. Tourism and investment in firms catering to overseas demand would also be affected.

The US, however, will ultimately bail out the financial market even if the House does not approve the current rescue plan, analysts said.

“It must rescue the market from this crisis, no matter how,” said Zuo Xiaolei, chief economist of China Galaxy Securities.

With a new rescue plan being discussed among policymakers, “an interest rate cut by the Federal Reserve is now a must to restore market confidence around the globe,” said Sherman Chan, an economist with Moody’s Economy.com’s Sydney office.

“Given the growing stress experienced by financial institutions in recent days, interest rate cuts by major central banks in the coming days seem increasingly likely.”

As the US crisis spreads to the Europe, governments there have been forced to bail out their financial institutions, with Fortis, the largest Belgian financial-services company, receiving an 11.2 billion euro ($16.4 billion) rescue package from Belgium, the Netherlands and Luxembourg over the weekend after its shares dropped 35 percent last week in Brussels trading.

Ping An Insurance (Group) Co,China’s second-largest insurer which has a 4.2 percent stake in Fortis, may set money aside in its third-quarter results to cover losses from the stake, which was more than 10 billion yuan ($1.46 billion) by last week.