'China Shock' jolts equity funds in Asia

Posted in China , Asia | 20-May-04 | Author: Miki Tanikawa| Source: International Herald Tribune

After a year of impressive gains, managers of Asian stock funds are reeling from what the locals call "China Shock" - the recent belt-tightening by the Chinese authorities to cool down the high-powered economy. South Korea has been particularly hard hit. An increase in share prices there was powered by two external engines: exports to China and purchases by foreign funds.

The fear that South Korea's biggest export client, China, will slow down has sparked a sell-off. The Kospi, the leading Korean stock index, has tumbled 15 percent since peaking at 939.52 points on April 23, wiping out the year-to-date gain of 12 percent. "They have lost what they had gained in 2004 in just two weeks," said James Byun, fund analyst at Morningstar Korea.

The pull-back was all the more drastic because of the very investors who had pushed it up: foreigners. Overseas funds own nearly 45 percent of the shares listed on the Korea Stock Exchange, and their latest withdrawal, precipitated by the unwinding of some hedge-fund positions, contributed to the drop.

"Retail investors have been selling consistently for the last few years, so foreigners have been very much the driving force of the index," said Spencer White, a strategist at Merrill Lynch Asia Pacific in Hong Kong.

A slowdown in China's economic growth could cut China-bound exports and thus trim growth in South Korea's gross domestic product, analysts said. Goodmorning ShinHan Securities predicts that a slowdown to between 7 percent and 8 percent, from a recent 9.7 percent, could cut 4.6 percent to 7.1 percent of South Korea's exports to China and pull down South Korea's real GDP growth by 0.1 to 0.2 percentage point.

But some analysts pointed out that the latest bout of selling in the region, which also hit markets like Hong Kong and Taiwan, had more to do with the global funds flow than their big neighbor's economic condition. The sell-off "coincided with the more hawkish rhetoric from China, but I don't think that is the root cause," White said. "It has more to do with the U.S. interest rate environment, the sell-off of U.S. bonds and the unwinding" of hedge-fund positions, among other things.

There also have been huge redemptions by U.S. mutual funds in association with these moves. White added, "You have seen almost $1 billion of outflow from the global emerging market funds in the last two weeks alone."

From a valuation perspective, the cheapness of South Korean stocks is clear, others noted. Woo Jae Kim, a strategist at Daishin Securities, said his firm was predicting that the Kospi would bottom out at 700 points, but after recent declines it might revise that lower. The index closed Wednesday at 777.95.

Exporting powerhouses like Posco and Samsung Electronics now trade at historic lows. But none of that matters, White said, "if people are raising cash to meet redemptions."