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Black Tuesday in China Darkens World Stock Markets

Posted by Author on February 27, 2007

R.M. Schneiderman, Forbes, 02.27.07-

Call it a day of global reckoning.

On Tuesday the largest decline in the Chinese stock market in more than a decade reverberated across international markets, (See “Black Tuesday In China“), as the major indexesin the U.S. and Europe plunged.

The Dow Jones industrial average slid 173.04 points, or 1.4%, to 12,459.22. The blue-chip stocks did slightly better than the broader Standard & Poor’s 500, which lost 1.5%, while the Nasdaq Composite — which contains many smaller and riskier shares — lost 2.2%. Earlier, European indexes were down about 2.8% following a nearly 9% drop in China.

Just a day after hitting a record of 3,040.60, the Shanghai Composite Index plummeted 8.8%, to close at 2,771.79, as investors feared the Chinese government would raise interest rates or implement a capital gains tax to cool the country’s economy.

“Rumors have been circulating in Hong Kong for a few days that Chinese Premier Wen will announced a new set of policies, such as raising interest rates to tighten China’s economy,” said Vincent Lam, director and fund manager of Quam Asset Management.

Investors also pulled back investment from the smaller Shenzen Composite Index, which fell 8.5%, to close at 709.81. Hong Kong felt the effects of the mainland pullback as well: the Hang Seng Index fell 1.8% to 20,147.87.

Despite the startling drop, Chinese officials did not issue any warnings or try and create market stability, something which stood in contrast to the government’s past policies during market slumps.

This year, analysts expect the Chinese economy to grow 9% to 10%. That level of expansion is necessary to bolster China’s rising standard of living and fast-paced industrialization. Yet if the country begins to grow beyond that pace, harmful inflation could creep into the picture.

China’s tumble wasn’t the only disconcerting news for investors. In Iran, the country’s foreign minister reportedly said his country would not bring its uranium enrichment program to a halt, reigniting concerns over a conflict with United States and other Western nations.

Meanwhile, in Afghanistan, three people reportedly died in a suicide bomb attack close to the U.S. military base where U.S. Vice President Dick Cheney was present. Cheney was uninjured.

In U.s. economic news, orders for big-ticket manufacturing items fell by 7.8% in January, far more than Wall Street was expecting. While a big portion of the decline pertained to an expected drop in commercial airplane orders, other manufacturing items also saw declines, hinting that the economy may be weaker than previously thought.

While not quite a wake-up call to the Federal Reserve, Ken Mayland of ClearView Economics said the report “underscores the fact that the fed funds futures markets has placed too low-odds on seeing one or more cuts in short-term interest rates in 2007.” While late last year many investors seemed to think the U.S. central bank would eventually reduce interest rates to foster economic growth, the pendulum has shifted — too far in Mayland’s view — to pervasive doubt that it would do any such thing.

Chinese shares trading in New York suffered as the day progressed. In midday trading, shares of China Unicom (nyse: CHU – news – people ) dropped 3.4%, or 45 cents, to $12.73, while shares of China Life Insurance (nyse: LFC – news – people ) lost 5.4%, or $2.29, to $39.91. China-based software provider CDC (nyse: CHINA – news – people ) shares fell 9%, or 93 cents, to $9.38.

Closed-end funds specializing in China-related stocks were pummeled. Shares of Morgan Stanley China Fund (nyse: CAF – news – people ) plunged 12.0%, or $3.57, to $27.26, while shares of Greater China Fund (nyse: GCH – news – people ) plummeted 10.4%, or $2.63, to $22.72.

Xerox (nyse: XRX – news – people ) also took a big hit, as shares fell 1.6%, or 28 cents, to $17.63, after the company cut its first-quarter profit forecast late Monday.

Elsewhere, shares of Sirius Satellite Radio (nasdaq: SIRI – news – people ) declined by roughly 2%, or 8 cents per share, to $3.66, after the company issued worse-than-expected subscriber guidance for 2007.

One Response to “Black Tuesday in China Darkens World Stock Markets”

  1. I fear more to come out of China once people really start realizing the lack of transparency in the public companies there. What will happen then?

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