Fallout from US bailout may spur Beijing into action after holiday

PUBLISHED : Thursday, 02 October, 2008, 12:00am
UPDATED : Thursday, 02 October, 2008, 12:00am

Reverberations from the United States financial crisis may prompt Beijing to launch new incentives to assuage market fears after the National Day holiday.

As the stock exchanges in Shanghai and Shenzhen are shut this week, brokers are in for a rocky time when they return to their desks on Monday.

With US financial regulators struggling with a bailout plan, their mainland counterparts are being put in a tight spot as they consider moves to plug potential capital market losses.

'Whether or not there is a US bailout plan, Chinese regulators should act in a decisive manner to rescue the economy and equity market at this critical moment,' said Chen Xuebing, a professor of finance at Fudan University.

'A dead stock market can hugely damage the economy.'

Mr Chen said hundreds of major companies would suffer severe impairment losses from falling equity prices if Beijing did not take drastic measures soon.

Mainland firms raked in huge equity investment returns riding on a 96.66 per cent market rally last year. However, they have suffered multibillion-yuan impairment losses amid a 56.4 per cent drop this year.

'It will be a horrible scene on Monday based on the current global market conditions,' said Wu Kan, a fund manager with Dazhong Insurance. 'We would bet that the regulators would intervene in the market again.'

The China Securities Regulatory Commission is reportedly fast-tracking the launch of margin lending and short selling to underpin the stock market. Some analysts speculated that the fresh market-moving measures would be given approval after the holiday.

Mr Chen also called on Beijing to take a bold step towards monetary easing to help buffer the mainland from the slowing world economy.

According to a Reuters survey, mainland economic growth would slow to single digits this year, expected to be 9.9 per cent, 0.1 percentage point down from the 10 per cent estimated by economists in the two previous quarters.

'The focus should shift to domestic consumption,' Mr Chen said. 'In the long term, China's formerly export-oriented economy should be fine-tuned.'

Economists agreed that a US bailout plan was desirable for China since a recovery of the American economy would benefit domestic exporters. However, the mainland economy would face inflationary pressure amid a weak US dollar and higher crude oil prices. Chinese firms might thus see their profit margins squeezed.

'We will likely see a sea change in the mentality of top policymakers in Beijing soon,' Merrill Lynch said in a report. It foresees cuts to taxes, interest rates and banks' required reserve ratios.


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