China’s crisis
WHILE ALL eyes were on faraway Greece and its unsettled row with its creditors, a far bigger financial crisis was happening next door, in China. In less than a month since panic-selling started in mid-June, China’s stock market has lost some $3 trillion in value—equivalent to more than 10 times the economy of the Philippines.
China’s stock market went on a dizzying climb that saw most share prices gain about 140 percent from July 2014. A correction—a euphemism for investors taking profits or cashing in on their gains—was expected, but a 30-percent slump was just too much. This led to government intervention to calm a panicking market. As of last count, a third or more than 900 companies have suspended trading on China’s stock exchanges, its central bank has cut interest rates to a record low and provided billions of dollars to the country’s biggest stockbrokerages to buy back shares in the market, and regulators have suspended new initial public offerings.
Western analysts are drawing parallels between China’s current malaise and America’s stock market crash in 1929 that precipitated the Great Depression of the 1930s: Both economies experienced booms characterized by extremely rapid credit growth, and borrowed money had a key role in creating stock market bubbles. But a major difference that is making it difficult for Western economists and analysts to predict a logical outcome to China’s current crisis is the fact that it remains a communist-planned and centrally-controlled economy that has managed to defy the laws of economics. Many experts believe it is strongly possible that this current problem will be no different from the crash of 2007-2008, when the Shanghai stock price barometer fell by nearly 70 percent, yet after heavy fiscal and monetary stimuli, the overall economy was hardly affected.
The crisis’ impact on the rest of the world is not so much about losses in stock investments because less than 2 percent of Chinese shares are reportedly owned by foreigners due to government restrictions. The worry is if China’s economy slows down, which can affect many countries that rely on exporting commodities like copper, nickel, iron ore and other raw materials to feed its mammoth industries.
In the Philippines, fears of a spillover from the China stock market crunch have added to the external headwinds that are causing uncertainty and volatility. Local analysts are of the view that unless China’s stock bubble leads to an economic depression, the impact on the Philippines will not be as harsh as on those countries that depend heavily on exports to China, such as Malaysia and Thailand.
Philippine markets, according to economist Emilio Neri Jr. of the Bank of the Philippine Islands, “will probably not be spared from volatility owing to our indirect trade and financial market linkages with China.”
However, Neri predicts that when data later prove that China’s economy remains resilient, the local market will bounce back immediately. Jose Mari Lacson, head of research at Campos Lanuza & Co., adds that one potential impact of the crash on the Philippines will be in terms of foreign direct investments. If the fall of China’s stock market affects the balance sheet and liquidity of Chinese multinational companies, then the Philippines can see local partnerships with those firms to be at risk.
A really bigger fear is if the crisis leads to a major economic slowdown in China; in that case, the Philippines should be more worried as it will be affected by slumping prices for products like copper and nickel, its two major exports to the mainland. Already, a sharp decline in commodity prices has led many mining stocks tumbling in the Philippine Stock Exchange last week. Listed gaming stocks have also been affected as Chinese high-rollers are the main source of the revenues of local casinos.
While Philippine regulators have so far downplayed the impact of the Greek crisis on the economy, the stock market collapse in China will have a bigger impact on the country. While waiting for developments, the Philippine government and the private sector should prepare and brace for any eventuality. And stock market investors would be wise to stay on the sidelines until after the dust has settled.
