China’s stock market tumble spooks the Kospi
Foreign exchange dealers at KEB Hana Bank’s headquarters in Myeong-dong, central Seoul, look at their monitors as major foreign stocks continue to fall. China’s CSI 300 market was closed for the rest of the day on early Thursday after it plummeted over 7 percent. Chinese authorities triggered circuit breakers for the second time this week after its implementation. [NEWSIS]
On Thursday, the benchmark Kospi fell as much as 1.21 percent to 1,902.04 at 11 a.m. after news broke that heavy selling on the Chinese markets triggered a circuit breaker after plummeting 7 percent and halted all trade for the day.
Although Seoul’s main bourse seemed to be stabilizing at around noon, narrowing the fall to less than 1 percent, the market closed at 1,904.33 due to last-minute selloffs, down 1.1 percent from the previous day, or 21.1 points.
Selling by foreign investors that has continued for 24 consecutive trading days only made things worse.
Although Thursday’s fall was weaker than that of Monday - the first time trading was suspended in China - it was evident that fear about the Chinese market and its economy in general is of paramount concern to investors, more than moves on Wall Street or nuclear tests by North Korea.
In fact, in the four trading sessions since trading for 2016 began on Monday, the Kospi ended three of the days lower than the previous day. While the claim of a hydrogen bomb test by North Korea only brought the Kospi down 0.26 percent, China’s stock market had a more powerful impact.
While Monday’s fall in China’s market was caused by disappointing economic data, Thursday’s drop was caused by the Chinese central bank’s decision to depreciate its currency much like in August last year.
The People’s Bank of China lowered the yuan’s reference rate by 0.5 percent from the previous trading day to 6.5646 per dollar, the lowest in five years. The move came at a time when the outlook for the Chinese economy is very uncertain. While China’s economic growth last year is speculated at between 6.7 percent and 6.9 percent, which would be the lowest in 25 years, this year’s growth is expected to be slower and possibly considerably so.
The decision to lower the value of the renminbi led investors to quickly withdraw their investments from the Chinese market, which led to a 7.21 percent plunge, closing down the market just 30 minutes after it opened.
“The Chinese government might continue to depreciate the currency for a while, but the rate of devaluation will slow down eventually,” said Ahn Ki-tae, an economist at NH Investment & Securities. “China is currently weakening the yuan because of poor exports to Europe, but the country will slow down the rate of depreciation as the euro is on a recovering trend.”
A similar situation happened last August, when the Chinese central bank unexpectedly devalued its currency to the lowest level in three years. That pushed the Kospi down 0.82 percent, bringing it below 2,000 for the first time in five months.
The move sparked concerns of a currency war. The Chinese central bank lowered the renminbi for two additional days afterwards, but the impact was limited as the market speculated that there would be no additional depreciation of the Chinese yuan.
In August, Minister of Strategy and Finance Choi Kyung-hwan said the depreciation of the Chinese currency will help the Chinese economy and contribute to expanding Korea’s own exports to China, which is its biggest trading partner.
“Analysts are mostly heedful of a weakening Chinese yuan, crude oil prices and U.S. rate hikes this year in terms of the macro-economy,” said Park Sung-hyun, an analyst at Samsung Securities. “The North Korea issue, as witnessed yesterday, isn’t a big deal now. Currently, it’s oil prices and the weakening yuan that are affecting the Korean market.”
“The Korean market doesn’t always follow the Chinese market,” he added, “but falls as sharp as 7 percent do have an impact on the Korean market because China is considered an engine of global growth.”
“Overall, we came to the conclusion that the impact of the North’s nuclear test has been limited on the financial and foreign exchange markets,” said Song In-chang, director general of the international financial policy bureau at the Ministry of Strategy and Finance.
“There was not much change in the stock market and bond rates, but the won-dollar exchange rate rose due to the weakening Chinese yuan.”
On Wednesday, senior officials of the Finance Ministry, Financial Services Commission (FSC), the Bank of Korea and other related organizations convened emergency meetings to keep movements in the financial market under check. Each government branch held separate meetings that monitored the markets until Thursday morning.
“The market seemed stable yesterday,” FSC Chairman Yim Jong-yong said at a meeting on the financial markets on Thursday. “North Korean issues, including missile firings, have had limited impacts on the financial markets in the past.”
However, the chairman didn’t overlook the North’s claim that it conducted a hydrogen bomb test, which many doubt, adding that the financial regulator won’t let its guard down.
“Along with the expected U.S. Fed rate hikes this year, uncertainties stemming from the Chinese economy are affecting the global financial markets,” Kim Yong-beom, secretary general of the FSC, said. “Uncertainty regarding the pace of the depreciating yuan can still serve as a problem for the market.”
Additionally, the World Bank lowered its forecast for growth of the global economy from 3.9 percent to 3.6 percent for this year. The bank cut its prediction for China from 7.0 percent to 6.7 percent.
If the dire atmosphere continues across the globe, it might be difficult for the Korean economy, heavily dependent on overseas conditions, to grow 3 percent.
The government has set a growth goal of 3.1 percent for this year by ramping up domestic consumption and investment.
Reaching the growth goal is even more important this year, when the Park Geun-hye government completes its three-year economic reform plan. In early 2014, Park announced her administration would raise the country’s overall employment rate to 70 percent and try to achieve both 4 percent yearly GDP growth and $40,000 in gross national income by 2017.
But the government faced unexpected hurdles, including the Sewol ferry disaster in April 2014 and the Middle East respiratory syndrome outbreak in May 2015, both of which froze domestic consumption for weeks and months.
Despite the government’s ambitious 3 percent growth goal, other predictions are less sunny. The Korea Development Institute, a state-run economic think tank, has forecast the Korean economy will grow around 2 percent in 2016 if the global economy remains as sluggish as last year.
The institute once again warned in a report on Thursday that export conditions would be aggravated this year largely due to the Chinese slowdown.
In its monthly report on economic trends, the institute pointed out recovery of the Korean economy is being held back by falling exports and growing overseas uncertainties.
“Due to plunges in exports, output is on the decline across industries, and the average operation rate is also on a downhill, which drags the current economic recovery trend,” the report said.
Korea’s exports plummeted 13.8 percent in December compared to a year earlier, the report showed. The country marked year-on-year falls in exports for 12 consecutive months in 2015.
Exports to China slid 16.7 percent last month. Exports to the United States fell 4.7 percent, and exports to Japan dropped 13.1 percent.
“As worries about the Chinese economic slowdown are mounting, Korea is highly likely to experience another year of low exports, which keeps the country’s industrial output from improving,” it said.
But some experts say the impact of the Chinese yuan depreciation could be limited.
Ahn Ki-tae, an economist at NH Investment & Securities, said the Chinese yuan fluctuation will have a limited impact on the local market since investors already have learned from past experience when China depreciated its currency about 5 percent in August.
KR Futures strategist Seo Sang-young said the fall in the Kospi will be temporary.
“Korea’s market will not fall as much as it did in August because the Chinese government will not let its economy become unstable,” he said.
Korea’s won fell to a four-month low on Thursday. The won weakened 0.3 percent to 1,200.60 a dollar.
“It won’t be easy to stop the currency decline in the short term,” said Park Yu-na, an analyst at Dongbu Securities. “The won trading above a 1,200 level puts a psychological burden on traders.”
BY SONG SU-HYUN, KIM YOUNG-NAM [song.suhyun@joongang.co.kr]
with the Korea JoongAng Daily
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