Brace for the China shock

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Brace for the China shock

China’s stock market is shaking. Although the Shanghai Stock Exchange showed a dramatic rebound Thursday, that could very well be a temporary reaction to the Chinese government’s drastic attempts to prop it up. After steep falls every Friday for three consecutive weeks, the Shanghai Stock Exchange Composite Index plunged to the mid-3000 range, a sharp drop from over 5,100. The fluctuations forced a total of 330 trillion won ($291.2 billion) worth of wealth in listed stocks to evaporate. That amounts to 10 times Greece’s gross domestic product and to the total capitalization of the listed companies in France. The losses in China shook major Asian stock markets in Korea, Japan and Hong Kong.

China’s government is making every conceivable effort to sustain the stock prices, including a temporary suspension of IPOs, eased regulations on credit, limits on futures trading and a ban on selling of the state’s stakes in stocks. On Thursday, over 1,400 companies - more than half the 2,800 listed firms - stopped trading their shares altogether. Yesterday’s 5.8 percent rebound on the Shanghai bourse owes much to Beijing’s stimuli measures - a sign of government intervention still working - but it is too early to totally reassure investors.

The busting of China’s bubble was largely self-inflicted. The Chinese government overly encouraged stock prices to go up in a bid to achieve economic reform, including the revamping of a multitude of state-owned companies. As a result, the Shenghai Stock Exchange Composite Index skyrocketed by a whopping 150 percent over the last year. The real problem is the speed in which the bubble is being burst. The dazzling pace will surely force a huge number of individual investors to cut their spending, which will definitely lead to financial shortages in banks, reductions in corporate investment, slowed consumption and stagnant growth. In the worst case, it could wreak havoc on China’s entire economy.

That heralds colossal risk for our economy. Korea’s exports to China accounted for 25.5 percent of its entire exports from January to June, nearly twice its level of exports to the United States. Given Korea’s investments in China hit $1.62 billion during this year alone - more than in Japan and Taiwan - our economy is arguably the most vulnerable to the China shock.

The government must prepare for the worst. Deputy prime Minister for the Economy and Finance Minister Choi Kyung-hwan said the effect on China’s stock bubble bursting on our economy is minimal. That’s wishful thinking. Given the Middle East respiratory syndrome outbreak and the Greek fiasco, the government must safeguard our economy. We are in troubled times.

JoongAng Ilbo, July 10, page 30

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