Investors flee China as sub-prime worries mount

Business Week look at the impending recession in the US and report that investors digesting this news are selling off the Asian stock markets after worries about the performance of exporters.

I tend to agree with the sentiment expressed in this article. The key is what exporters do with unwanted stock. Selling them in the local market at low prices will harm domestic competitors and hammer margins. Although useful as a means of slowing inflation, the employment effects may be serious in the medium term.

Subprime Fears Pelt Asia's Markets [Business Week]

So much for the theory that a U.S. slowdown won't hurt Asia. For months, many Asia watchers have predicted that strong demand in China and India would allow the region to "decouple" from the U.S., Asia's traditional engine of growth. For today at least, investors lost faith in that theory. Stock markets across the region plunged Jan. 16, following scary news from the U.S. about huge losses at Citigroup (C), disappointing numbers from Intel (INTC), and surprisingly weak U.S. retail sales figures for December.

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Even mighty China may not be immune. "American consumers have been using their homes like ATMs," Morgan Stanley (MS) Asia Chairman Stephen Roach said at a conference Jan. 13 in the southern Chinese city of Sanya. "That game is over. If the U.S. consumer falters, China is going to feel it."

The worry among investors now is what faltering demand from the U.S. means for Chinese exporters. "Export-related companies are definitely going to have a tough time ahead," says Tony Yam, chief investment officer at SMC China Fund, a hedge fund investing in Chinese shares. One quarter of the country's exports go to the U.S., and another 35% go to European countries, many of them also facing serious downturns.

Chinese exporters, suddenly unable to find as many buyers in the West, might try to sell more of their goods at home. That would put downward pressure on prices in China and threaten some local companies (BusinessWeek.com, 11/15/07). "You could see some corporate distress, which impacts banks, supply chains, and suppliers," says Green, who predicts Chinese gross domestic product growth will fall to 9.5% this year from 11.5% in 2007.

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