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China: troubled time ahead?
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July 29, 1998: 3:10 p.m. ET
Earnings fears weigh down stocks; analysts say ripple effect could worsen
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NEW YORK (CNNfn) - Earnings disappointments sent Chinese currency shares tumbling Wednesday afternoon, as the Shanghai index plummeted nearly 6.5 percent. But experts say the sudden selloff of Chinese stock is indicative of much larger problems in the Asian markets and could be the harbinger of troubled times ahead.
"In the past couple of years, the Chinese economy has been experiencing tremendous growth, but along with that growth comes a lot of uncertainty concerning inflation," said Robert J. Carbaugh, professor of international economics at Central Washington University. "That's been a major problem in China for a while now, the inflationary potential."
Weakness in Korean, Japanese and Indonesian currencies, he added, have made it difficult for those countries to import products from China. That, in turn, makes Chinese goods and services relatively more expensive -- an economic inequity that is beginning to take its toll on the bottom line of Chinese companies.
"There's a ripple effect that is going on in China as a result of the East Asian economic crisis," Carbaugh said. "That is beginning to show up in falling profit margins, which forces China's stock market down. Everybody is connected to each other. The question is how strong is that connection?"
Carbaugh declined to speculate on the significance of the Shanghai index drop Wednesday, but said any dip in the Chinese stock market these days is directly related to the depressed economies of its Asian neighbors.
China's hard currency B shares hit new lows Wednesday morning after Inner Mongolia Yitai Coal reported that its first-half profits slid almost 64 percent from a year ago.
The news sent the Shanghai index sliding 2.125 points to 30.683, trumping a previous low of 32.636 set on Tuesday.
On the southern bourse of Shenzhen, shares also were pressured by worries over corporate earnings and regional economic concerns. The Shenzhen B share index lost 3.36 points, or 4.89 percent, to 65.26.
Earlier this month, Goldman Sachs lowered key economic forecasts for the Asia Pacific region and said it expects gross domestic product contraction to be deeper this year, going into negative or near-zero growth territory next year.
South Korea this week also posted a record 13.3 percent drop in industrial output for June, a sign that the downward economic spiral which began last November is still far from over.
Investing in Asia
Douglas Wilde, global investment strategist at Merrill Lynch, said the Shanghai index is notoriously volatile and noted the sharp drop in the index Wednesday is no cause for alarm.
On the other hand, he said, investors should not necessarily view the downturn as an invitation to begin bargain hunting for Chinese stocks in the Shanghai index. Other stock markets show greater growth potential, he said.
"We still like the China story, but we prefer to play through the Hong Kong market, which is a lot deeper and more sophisticated," he said. "Accounting irregularities and the earnings disappointments we got overnight are not as common in Hong Kong."
Wilde upgraded his outlook on Korea last week, a reflection of "signs on the micro, corporate level that companies are starting to de-leverage themselves. They are selling off their assets and focusing in on their core businesses."
Thailand, too, is showing signs of healthy corporate streamlining and is further along in the economic reform process. But that market, he said, is significantly smaller than Korea, producing lower value goods.
"We are definitely not saying this is a buying opportunity in China, but we are looking at other markets in Asia," he said. 
--by staff writer Shelly K. Schwartz
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