China credIt crunch hIts global bourses

China’s stock market plunged by more than 5 per cent – leading to falls in global markets, amid concern a liquidity squeeze will cripple the world’s second-largest economy. The Stock Exchange of Thailand was battered all along, with the composite index surrendering 36.41 points, or 2.60 per cent, to 1,364.09 points, on turnover of Bt44 billion. The market has witnessed losses in four of the last five trading days. From end-May, the index has retreated over 10 per cent. 

The key Shanghai Composite Index, which tracks shares traded in local and foreign currencies, closed down 5.3 per cent at 1,963.24 points. The smaller Shenzhen Component Index sank 6.73 per cent, with bank stocks among the biggest losers on the two markets. 

The knock-on effect was seen at other stock markets. Sydney, where several firms rely on Chinese growth, slipped 1.47 per cent. European stocks also opened lower. 

The Chinese factor brought in another worry for the health of emerging economies. Global markets were already reeling from the US Federal Reserve’s announcement last week that it will likely begin reeling in its stimulus programme this year.

Tisco Securities said in a research note that the Thai market is now heading downhill, as outflows have not stopped. In this month, foreign investors have been net-sellers, with sales outpacing purchases by Bt47.2 billion – boosted by yesterday’s unloading of Bt2.3 billion in stocks.

According to data from Deutsche Bank and Tisco Securities, as of Friday, foreign capital outflows from the Thai stock market this month reached US$1.46 billion. Indonesia, Taiwan and South Korea were suffering more severely, with outflows of $1.9 billion, $3.25 billion and $4.5 billion.

Year-to-last Friday outflows from the Thai market topped $2.19 billion, below only $8 billion in outflows from South Korea. India has attracted the highest amount, at $14.3 billion.

Yesterday’s sell-off was sparked by news that Goldman Sachs had cut its estimate for China’s economic growth this year to 7.4 per cent from 7.8 per cent, citing weaker economic indicators and tighter financial conditions. China has been a crucial driver of global growth. It expanded 7.8 per cent in 2012, the slowest pace in 13 years, and 7.7 per cent in the first quarter of this year, well below forecasts. 

Its economic expansion spurred demand from other countries. In the first four months of this year, 12 per cent of Thai exports were destined for that market.

The situation could deteriorate as China’s central bank refuses to inject money into the financial market, apparently to squeeze injection into the informal banking sector, which is posing risks to the economy.

“What we’re seeing is a shift in the policy agenda of China, which will take place in the next six to nine months,” James Bevan, chief investment officer at CCLA Investment Management in London, said on Bloomberg Television. “During that period, we will have continued volatility and continued uncertainty. It will be painful as the adjustment goes through.”