China batters world stock markets

"China(s)"

02/27/2007

TAVIA GRANT
Globe and Mail


Canada's benchmark index posted its biggest drop in eight weeks after China's key index fell the most in a decade, sparking concern that turbulence in the world's fourth-largest economy may hurt the rest of the world.

Canada's benchmark index shed about 1.4 per cent. The Shanghai composite index, which hit a record a day earlier, tumbled 8.8 per cent Tuesday.

The decline underscored the growing importance China has to economic growth and financial markets. Companies most reliant on China, such as Zi Corp. and uranium miners, were under pressure Tuesday amid fears that demand could buckle and commodity prices could fall.

The key will be whether Tuesday's plunge is a one-day affair, or the start of a prolonged downward trend, market strategists said.

“If it worsens in the days ahead, it could slow China's economy and that could, in turn, put downward pressure on commodities prices,” hurting resources companies and possibly the Canadian dollar, said Sal Guatieri, senior economist at Bank of Montreal.

Emerging markets in Asia also fell, along with European stocks, as the plunge shook investor confidence.

Canada's S&P/TSX composite index fell 196.60 points to 13,207.86, led by gold, energy and information technology stocks. It was the biggest drop since early January.

The move in China also may cause investors to have a second look at other investments that are perceived as risky, Mr. Guatieri said.

“It tends to shake confidence. If one market comes unglued, the market will look at other markets that are a bit frothy.”

In Canada, intelligent interface software designer Zi Corp., which does business in China, plummeted 23 cents to $2.49. Uranium miners, such as First Uranium Corp. and Mega Uranium Ltd., also fell.

Tuesday's drop on the Chinese markets was triggered by profit-taking and speculation that new austerity measures from the government will slow the nation's sizzling economy. The rout wiped $107.8-billion (U.S.) in value from the market, Bloomberg reported.

The Shanghai composite index tumbled 8.8 per cent to close at 2.771.79, its biggest decline since it fell 8.9 per cent on Feb. 18, 1997, at the time of the death of Communist Party elder Deng Xiaoping. The index had gained 1.4 per cent on Monday to a record 3,040.60.

The Shenzhen composite index on China's smaller exchange plummeted 8.54 per cent Tuesday to 709.81.

Chinese share prices doubled last year as investors piled into the market following the completion of shareholding reforms that helped to reduce worries over a potential flood of shares entering the market.

But stocks have been extremely volatile this year, with Shanghai notching one-day drops of 4.9 per cent and 3.7 per cent already this year — before recovering to hit new records.

On Tuesday, market heavyweights plunged on heavy selling by institutional investors, which in turn spooked retail investors.

“The most important reason for today's decline was pressure for profit-taking,” said Peng Yunliang, a senior analyst at Shanghai Securities.

“People viewed 3,000 as a psychological benchmark. It's understandable they might want to pull back after the market hit that peak,” Mr. Peng added.

The April contract for light sweet crude on the New York Mercantile Exchange fell 89 cents (U.S.) to $60.50 a barrel after rising for the past four sessions, partly because a storm in the U.S. was expected to drive up demand for heating oil.

The energy sector lost 1.75 per cent with EnCana Corp. down $1.30 to $56.

Losses were led by a plunge of almost five per cent in the metals and mining sector as copper prices in New York were down six cents to $2.82 (U.S.) a pound. Teck Cominco gave back $2.87 (Canadian) to $82.64.

And the April gold contract on the Nymex fell $9.30 (U.S.) to $680.60 (U.S.) an ounce.

The Canadian dollar slipped 0.03 of a cent to 86.13 cents and the TSX Venture Exchange dropped 84.54 points to 3,190.1.

The Dow Jones industrials fell 104.62 points to 12,527.64 after losing 15.22 points Monday. The Nasdaq composite index dropped 10.58 points to 2,504.52 while the S&P 500 index declined 1.82 points to 1,449.37.

Economic data also weighed. on markets.

U.S. orders to factories for big-ticket manufactured goods plunged in January by the largest amount in three months.

The Commerce Department reported Tuesday that orders fell 7.8 per cent in January, compared to December, led by an 18 per cent plunge in transportation orders, reflecting a big decline in orders for commercial jetliners and continued weakness in auto manufacturing. But there were widespread decreases in a number of other industries as manufacturing continued to be affected by an overall economic slowdown.