The sharp decline in Chinese stocks is approaching a milestone: With a 4% drop Friday, the market has fallen by nearly half since its peak last fall. The decline has wiped out nearly $2.5 trillion of wealth and is testing the government's apparent resolve to let the market find equilibrium on its own.
The plunge has slashed the savings of millions of Chinese investors who jumped into the market as it rose six-fold in two years. It is crimping expansion in the country's nascent financial sector and may put a squeeze in corporate coffers. But so far, it has not slowed the world's fastest-growing major economy.
The benchmark Shanghai Composite Index has lost 49% since topping out, along with other global markets, last October. The slide was triggered by the global economic slowdown combined with the lofty valuations of Chinese stocks. It accelerated recently as investors became convinced the government would not intervene to stop the fall. The index finished Friday at 3094.67, down 4%.
While Chinese shares have been among the hardest-hit anywhere, some other emerging markets have also had a tough time, falling 6% so far this year after rising an average of 32% a year over the past five years. The other big loser is India, which was the other big winner over the past few years. The Mumbai Sensex Index is down 19% so far this year.
Arjun Divecha, an emerging-markets specialist who manages about $20 billion for GMO LLC, says that until recently, investors bought pricey stocks in both markets because these economies were seen as the fastest-growing. "But with U.S. and global growth expectations slowing, it's the markets that were bid up the most that are getting hurt the most now," he said.
The Shanghai Composite posted a record close of 6092.06 on Oct. 16. The total value of all of the stocks on China's two exchanges -- in Shanghai and Shenzhen -- peaked on Jan. 11, at about $4.9 trillion. The losses since then are equal to more than 70% of China's 2007 gross domestic product. China can no longer boast that state-owned oil company PetroChina Co. is the world's most valuable listed company.
Most U.S. investors are unlikely to feel much direct impact from China's stock fall, because the shares traded in Shanghai and Shenzhen are off-limits to the vast majority of foreigners. While a few U.S. funds have received permission to invest in these stocks, "it's very speculative, and the quality of companies is not comparable to the Chinese companies listed in Hong Kong," says Richard Gao, portfolio manager of the $1.5 billion Matthews China Fund in San Francisco.
However, some international funds are feeling pain because the plunge in Shanghai-listed shares has been matched by similarly steep declines in shares of Chinese companies listed in Hong Kong, New York and elsewhere. The iShares FTSE/Xinhua China 25 Index Fund, an exchange-traded fund listed on the New York Stock Exchange, is off by 33% from its peak last fall. The Matthews China Fund is off by 32% from its peak.
Both India and China have seen inflation fears worsen in recent weeks, which could force their governments to tap the brakes harder on economic growth. "That would hurt corporate earnings," says Mr. Divecha, the money manager.
Some emerging markets are holding their own. Russia's stock market is off just 5% this year, while Brazil's benchmark index has climbed 1.6%. Analysts say their better performance reflects cheaper stocks and the commodity boom. Russia and Brazil are big commodities exporters, although demand growth may slow along with slower economic growth in China and India.
The Shanghai Composite's 34% drop in the first quarter was the worst ever for China's stock market. The past week was its worst week in over a decade, with the Shanghai index down 11%.
Even so, China surprised analysts earlier in the week when it reported a 10.6% rise in GDP for the first quarter, bolstered by double-digit gains in retail sales and home prices that helped offset slowing exports.
For the economy, "there's no clear impact" from the stock market, says Gene Ma, president of China Economic & Business Monitor Group Ltd. in Beijing. He says the economy never got a boost from consumers spending their stock-market gains, so the downturn isn't doing much to affect consumer behavior.
Investor psychology, however, has taken a big hit. Last August, Qiu Jiaxin, a 27-year-old school administrator, bought 100,000 yuan, or about $14,000, of Shanghai-listed Western Mining Co. after its stock more than doubled to about 60 yuan a share. Looking at the global resources boom, "we thought it would go up again," says Mr. Qiu.
It didn't. The stock now trades at 20.85 yuan, and Mr. Qiu has delayed a home renovation and pushed plans for his wedding to 2009. The Shanghai resident isn't selling just yet. "It is not a small pool of money. It is a big loss to us," he says. "If we don't sell, it is only a paper loss."
China's market turn