SHANGHAI, China – Chinese stocks plunged nearly 9 percent Tuesday, their biggest drop in a decade, rattling markets from Hong Kong to Singapore and as far away as New York amid fears of a slowdown in China’s economy.
Investors were also spooked by comments Monday from former Federal Reserve Chairman Alan Greenspan, who said a recession in the U.S. was “possible” later this year.
One day after sending Shanghai’s benchmark index to a record, investors dumped stocks to lock in profits amid speculation about a fresh round of austerity measures from Beijing to slow the nation’s sizzling economy. The Shanghai Composite Index tumbled 8.8 percent to close at 2.771.79, its largest decline since it fell 8.9 percent on Feb. 18, 1997, at the time of the death of Communist Party elder Deng Xiaoping.
Meanwhile, the price of oil fell on speculation that a slowing Chinese economy would slice into demand for fuel. A barrel of light, sweet crude was down 56 cents $60.83 in pre-market trading on the New York Mercantile Exchange.
“The (rumors) that China is going to impose a capital gains tax resulted in regional markets falling,” said S. Sharath, an analyst with MIDF-Amanah Investment Bank in Kuala Lumpur, Malaysia, where the benchmark index tumbled 2.8 percent.
But Greenspan’s comments also took a heavy toll on Asian markets.
“Our economy is also dependent on the U.S. economy, if there is adverse news, exports from our country is going to drop,” Sharath said.
In Hong Kong, the benchmark Hang Seng Index tumbled 1.8 percent, while Singapore’s Straits Times index sank 2.3 percent. Markets in Japan and Taiwan, however, registered only modest declines.
The plunge spilled over to New York, where the Dow Jones industrials tumbled 416.02, or 3.29 percent, to 12,216.24. In London, the FTSE-100 dropped 2.31 percent, France’s CAC 40 dropped 3.02 percent and Germany’s DAX lost 2.96 percent.
Major Latin American markets closed sharply lower Tuesday. In Brazil, which depends heavily on exports such as steel, soy beans and iron ore, to China, Sao Paulo’s Bovespa index finished off 6.6 percent, Mexico City’s IPC index shed 5.8 percent, the IPSA index in Santiago, Chile ended down 5.0 percent, while in Buenos Aires, Argentina, the Merval dropped 7.4 percent. Chinese share prices doubled last year as investors piled into the market following the completion of shareholding reforms that helped to reduce worries over a potential flood of shares entering the market.
But stocks have been extremely volatile this year, with the Shanghai index notching one-day drops of 4.9 percent and 3.7 percent in January – before recovering to hit new highs. On Monday, it closed at a record 3,040.60.
Tuesday, market heavyweights plunged on heavy selling by institutional investors, which in turn spooked retail investors who decided to cash in their recent gains rather than risk losing them in a severe market decline.
“The most important reason for today’s decline was pressure for profit-taking,” said Peng Yunliang, a senior analyst at Shanghai Securities. “People viewed 3,000 as a psychological benchmark. It’s understandable they might want to pull back after the market hit that peak.”
China’s economy last year grew 10.7 percent – the highest rate since 1995 – and a central bank report at the beginning of the year estimated it would expand 9.8 this year.
On Monday, banks were required to raise the amount of money they must hold in reserve to 10 percent from 9.5 percent, reducing the amount available for lending. Authorities had last raised the reserve ratio on Jan. 15. The government, worried that excessive borrowing could trigger a debt crisis, also raised interest rates twice last year.
In comments to a business conference in Hong Kong on Monday, Greenspan said the U.S. economy has been expanding since 2001 and that there are signs the current economic cycle is coming to an end.
“When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign,” Greenspan said. “For example in the U.S., profit margins … have begun to stabilize, which is an early sign we are in the later stages of a cycle.”
“While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 … with some slowdown,” he said.
In Europe, companies with exposure to Asian markets led the declines.
BHP Billiton, the world’s largest mining company, declined 4.8 percent to 1066 pence. Rio Tinto Group, the third biggest, lost 4 percent to 2824 pence.
Standard Chartered PLC, a British bank that earns most of its money in Asia, slipped 2.1 percent to 1,477 pence, or $29.00, on the London Stock Exchange.