How will China be affected by the financial crisis?

The difficulties recently faced by American and international financial institutions have engendered an unprecedented financial crisis. The plunge of the stock markets worldwide and the rejection at the beginning of the week of a rescue plan to save the American banking sector only added insult to injury in terms of declining investor confidence. How will this crisis affect the Chinese stock markets, which already lost over 60 percent of their value between November 2007 and September 2008.

China, with a growth rate surpassing 10 percent, has made its way to third place in the ranking for the world's largest economies. Despite the fact that the Shanghai stock exchange hit the 6,000 point mark in November 2007, growing fear over the speculation bubble in the real estate sector bursting and rising inflation have cooled down the Chinese financial market. On September 18, the Shanghai Stock Exchange plummeted to below 2000 points, resulting in a 60 percent loss of value in ten months.

Chine Hebdo talked with Louis Thannberger, president of Europe Finance et Industrie (EFI), before the Bush administration asked for 700 billion dollars to be injected into the market to support the banking sector. Thannberger said he held the conviction that the Chinese economy would not be badly damaged by the crisis.

For Thannberger, who had predicted the collapse of the stock market already several months ago, as did Ben Bernanke, the chairman of the US Federal Reserve, the Chinese financial market remains promising. To back up this opinion, he refers to the more than 3,500 small and medium size companies waiting to be listed on the Shanghai Stock Exchange, which include companies he hopes to convince to list on the Paris Stock Exchange as well.

In Thannberger's opinion, the crisis is testimony of a shift in economic paradigms where capital moves from west to east. The financial centers of the country such as Shenzhen and Shanghai have reacted quite moderately to the heightened risk in the global marketplace. After the announcement of the collapse of Lehman Brothers on September 15, the Shanghai bourse reacted with a drop of "only" 4.7 percent…

On September 18, small shareholders could breathe a little bit easier after Central Huijin Investment Co., Ltd., an investment arm of the government, announced it had increased its shareholding in three of China's largest commercial banks. At the same time, the Bank of China, the country's second largest lender, invested 236.3 million euros in Rothschild, one of the world's leading independent investment banking organizations, in a move perceived as a strong sign of the confidence the Middle Kingdom maintained in the middle of the storm. However, it is worth mentioning that should American and European banks deem nationalization to be the right tool for reestablishing themselves, Chinese banks already have the advantage of enjoying the state's backing and the security of the state's considerable foreign exchange reserves, just in case...

Nevertheless, some cause for concern remains. At the United Nations General Assembly in New York, Premier Wen Jiabao said that the "crisis has affected many countries and its international impact could become 'more serious.'" Although China is one of the top foreign holders of US Treasury obligations, and in this sense, undeniably plays a big part in the American economy, it is not expected to suffer greatly from the repercussions of the crisis. International Monetary Fund president Dominique Strauss-Kahn had nothing more to comment this week. While he underlined the fact that the situation did present risks for emerging economies, he excluded China, Russia, Brazil and India from the list of countries most threatened by the crisis due to their substantial trade surpluses and sizable foreign exchange reserves.

Yet stock markets around the world remain jittery and are likely to react in an immediate manner to the outcome of the vote on plan B for saving the American banking sector. Hong Kong's Hang Seng index, the indicator most susceptible to fluctuations on the global marketplace, plummeted 5.6 percent immediately at the start of trade (on Tuesday, September 30) after the American Congress voted against Paulson's rescue plan.

The Shanghai and Shenzhen stock exchanges have so far been unaffected by this week's tension, because they have been closed for the National Day holiday.

The Shanghai Stock Exchange, the most sensitive to developments on other bourses due to its dependence on large foreign investors, will not open until Monday, October 6.

“The implied volatility for the markets (a securities market risk indicator ) soared to 50 percent this week (VIX), in reaction to the prevailing nervousness and the fear of systemic risk in the financial sector. Those Asian banks that have been closed this week have, for the time being, escaped the tumult. But if the stock markets regain value after the vote on plan B, the ensuing impact will be relatively weak for the coming weeks ("smoothing effect"),” an assets manager from Belgium's largest private bank Bank Degroof told Radio86.

The approval of a rescue plan for American banks is expected to calm the financial sector, including China's markets. "But if the second rescue plan is not approved, the Chinese financial markets will most likely join the global market slump,” the Belgian bank warns.