Rumors Drive Volatility of Chinese Markets

Wild rumors about the Chinese government are probably to blame for Tuesday's sharp sell-off in the Chinese stock market. What kind of market is this? Should it have such an instant, negative effect on financial markets in the United States? Tom Easton, Asia business editor for The Economist magazine, offers his perspective in a conversation with Renee Montagne.

How are stock investors in Shanghai reacting today?

Interestingly, the market bounced back today (Wednesday). It's up about 4 percent. And if you're a critic, I don't know if you would be more critical, or more worried, about the decline yesterday of 9-10 percent, or the increase today of 4 percent.

Both of them have really no evident reason for why they would occur. So the question is: What is driving the market?

Typically what you would imagine would drive a stock market move is what is going on with companies. After all, if people think they make a lot of money, shares tend to go up, and if they're losing money, shares tend to go down.

But in this case, every single reason that has been cited for the market movement has had to do with a government action. None have had anything to do with any of the companies in the Chinese market.

The level of involvement of the government in the Chinese market sets it apart from many other stock markets. How is the government involved?

It takes place on a number of different levels. For most of the largest companies in China, the largest shareholder is the government. All the market has to know is that the government is going to sell a lot of the shares that it owns in these companies and they can really anticipate with great accuracy that they'll be flooded with new shares to buy and prices could, very conceivably, go down.

The second way that the government controls things is through all the actions that it takes around the market. For instance, the rumor yesterday that was considered quite jarring to people was that the government would impose a capital gains tax. Today, the government let it be known, possibly because of the steep sell-off yesterday, that it would not impose a capital gains tax.

There was great concern that the head regulator for the government was going to resign. There's been no sign that he would resign today.

There was indications, or rumors, that the government was going to encourage, or force, insurance companies, which again, they are the largest shareholders, to sell their shares in the stock market. Again today, there doesn't seem to be any indication that they're doing it.

You know, you can go through every idea about why the market was falling and it all goes back to some action of the government. And in fact if that is true, and that's clearly what people believe, then you really have to wonder what sort of market is it? Or is it a market in any sense that we understand in terms of trying to balance off the profitability of a company, or supplies and supply and demand.

I guess at the end of the day what people are saying is, the profitability of companies and their ability to distribute stock and their ability to remit the things that stocks bring, like, for instance, dividends to shareholders, all stems from government action.

Why did what happened in China have such a big impact on the U.S.?

In the entire Chinese market, the amount of shares that foreigners are allowed to buy is slightly under $10 billion worth. They are a tiny part of the market. And that $10 billion is a tiny part of the world capital market.

So, in terms of money and economic value, the global exposure to the Chinese stock market is close to non-existent.

I think what people are worried about is, does a market suggest what's going on in the broader economy. Did the sell-off in China mean something was going on in China that would somehow imperil global growth.

China has been incredibly important for the world's growth. Its economy has been expanding at an extraordinary rate, something, I don't know, in excess of 12 percent a year. And if China stopped expanding at the rate that it was expanding, it could have serious repercussions throughout the world.

Is this the first time U.S. and European markets have been rattled by China's financial markets?

The market had a sell-off about a month ago. And that rattled people a bit here. But it didn't seem to have the same impact on the Western market.

What happened in the Chinese market happened at the same time as Alan Greenspan made some disconcerting comments about the American market, it happened when you have all the loses in the mortgage markets.

It came at a time when people were concerned about other things. And symbolically China means a lot.

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