Stock selloff in China hits Wall Street hard
Wednesday, February 28, 2007 7:15 AM PST
By Associated Press
Printable version
E-mail this articleWASHINGTON -- A plunge in Chinese stocks rippled across global markets Tuesday, triggering a massive wave of selling in the United States that sent the Dow Jones industrial average down 3.3 percent, or 416 points, its biggest decline since March 2003.
The news from Asia sparked the initial sell-off, but a confluence of other events, including news of rising real estate loan delinquencies, a surprisingly weak manufacturing report and a bombing near Vice President Dick Cheney in Afghanistan, made an already difficult day worse.
For most of the morning the Dow declined steadily until it had fallen 300 points. Then, just before 3 p.m., it suddenly plummeted another 200 points before recovering slightly because of a trading glitch that led to a backlog of sell orders clearing at once. The Standard and Poor's 500-stock index, a broad measure of stock prices, also lost more than 3 percent by the close of the trading day, its biggest drop in three and a half years.
In Wednesday morning trading, Japan's Nikkei 225-stock index fell 3.56 percent, to 17,475.07.
From currency markets to blue-chip companies to international stock exchanges, no sector was left unscathed Tuesday. The day was reminiscent of when the Internet bubble burst several years ago -- traders and investors around the world stared at electronic boards and televisions showing markets falling deeper into the red.
Todd Leone, head of trading at Cowen & Co., said he saw "nothing but sellers. My whole screen is red. Every group is down."
Adding to the market's woes, former Federal Reserve chairman Alan Greenspan warned in a speech Monday that the U.S. economy might slip into recession by year's end. "It didn't help that Greenspan used the `R-word,"' said Al Goldman, chief market strategist at A.G. Edwards. "People overreacted to that. He's still an icon."
Some analysts said, however, that it was about time for the market to cool after a breathless run-up in share prices.
"I don't think a one-day (sell-off) is going to do justice for what's been going on," said John O'Donoghue, co-head of equity trading at Cowen. "It wouldn't surprise me to see a total 5 percent correction and even more from here."
A major long-term concern among analysts is whether the heady days of "cheap debt" is coming to an end. The ability to borrow money at low rates and with favorable terms has fueled much of the world economy in the past few years, including the record-topping leveraged buyouts on Wall Street, the global run-up in real estate prices and the surge of investments in emerging markets overseas.
Signs surfaced Tuesday that the easy availability of debt may be ending.
The mortgage company Freddie Mac announced tougher standards for its "subprime," or risky, mortgages, saying it would not buy loans that are linked to a high number of delinquencies and defaults.
Moreover, investors fled emerging markets and took safe positions in the currencies of Japan and other countries where borrowing costs are among the lowest in the world. As emerging markets took it on the chin, the yen climbed 2.3 percent yesterday, the most in nearly a year, against the dollar.
This occurred because investors sought to protect their money in case of a sustained downturn. During a growing global economy, these investors can take more risks and make higher returns by borrowing money and pouring it into emerging economies, such as China and India.
To many investors, Tuesday's events were a stark demonstration of how the global economy, not just that of the United States, has vulnerable spots.
That a sell-off in China could have such serious reverberations around the world was noteworthy, said Joseph Stiglitz, a Nobel prize winner and former chief economist at the World Bank.
"China has been the engine for global growth," Stiglitz said. "And a significant slowdown in China would have fundamental implications for commodity prices around the world. ... Oil prices have been sustained by high Chinese demand. Just think of what would happen if there's a significant part of China that had a slowdown."
Analysts in China blamed Tuesday's plunge, which at 9 percent was the largest single-day drop in a decade, on the news that the State Council's crackdown on illegal activities related to securities trading. According to a statement on the government's Web site, a special task force would be convened to provide recommendations for how to "repair" illegal securities activities.
China's stock markets began their surge upwards in June 2006, after the government allowed domestic initial public offerings again after a long hiatus. There were a number of other securities milestones last year. The government took $200 billion of stock it owned and allowed it to be traded publicly. And several of the country's largest state-owned companies, including the Industrial and Commercial Bank of China, were dual-listed on the Shanghai and Hong Kong stock exchanges.
The Shanghai Stock Exchange rose 130 percent in 2006, and it was up 12 percent from Jan. 1 to mid-February. Just before the Chinese New Year holiday, the Shanghai Stock Exchange broke the 3,000-point mark for the first time.
Signs that China's two domestic stock markets, in Shanghai and Shenzhen, may be over-inflated began to show up in early February after Cheng Siwei, vice chairman of the Nation's People Congress, said publicly that he worried about a "bubble." The stock market fell 11 percent that week but quickly made up the losses and continued to hit new highs.
Then came China's "Black Tuesday," which Tuesday wiped out $100 billion of market capitalization.
Feng Yu, a broker at China Galaxy Securities in the southeastern city of Ningbo, said he believes Tuesday's drop was only a "technical correction" to make up for the unprecedented run-up in recent months.
"At the beginning it was just banking stocks," Feng said. "Then it affected all shares," Feng said he believes the drop was precipitated by signals from the government that it wants to slow down the explosive growth, which has prompted individual investors to line up for hours to open brokerage accounts.
Another piece of troubling news was released Tuesday: Durable-goods orders in January fell 7.8 percent to a seasonally adjusted $204 billion, the Commerce Department said. The decline in durable goods, including large-order items such as airplanes, semiconductors and appliances, surprised Wall Street, which had expected a 3.2 percent drop.
In Washington, the confluence of world economic events got the attention of the White House.
"The president's economic advisers are paying attention to the markets," White House spokesman Tony Fratto said. "We continue to believe that the U.S. economy is sound."
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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