Frederik Balfour of the Wall Street Journal reports on the uncertainty of the Chinese economy:
Speculation in the stock market by company treasurers in China is nothing new. During the 2006-07 rally, when the index rose 360%, Chinese companies used profits to invest heavily in the stock market, in some cases boosting their bottom lines by as much as 30%.
What makes the current situation potentially more dangerous is that companies now making stock purchases are using bank credit, so if the market heads south, they’ll will be unable to repay the loans. “Clearly there is a problem if they are not doing this right. If you take a punt and cannot get the money back, it could totally go wrong,” says Lou.
Indeed, this could well be a sucker’s rally. Even in good times, China’s market is notoriously volatile. Today, China is headed for its slowest growth in a decade—as low as 6.7%, according to IMF estimates, only about half the 13.1% it grew in 2007 and well off last year’s 9%. While some favored sectors such as steel and cement will benefit from the government’s $568 billion fiscal stimulus package announced in November, corporate earnings elsewhere will take a heavy beating. China’s exports plunged 17.5% year-over-year in January, while at least 20 million migrant workers have lost their jobs in recent months. More than 63,000 factories closed their doors in 2008, and the number of casualties could grow this year. “As I remember, for the past 10 to 20 years this is the worst situation I have ever encountered,” says Paul Lin, president of the Chinese Manufacturers Assn. of Hong Kong.
