Sunday, March 04, 2007

2007 Markets Meltdown–How It Happened? – Paul Krugman, Economics Professor Princeton U; S Roach (STANLEY MORGAN): China Made Market Correction

UPDATE: 5th Mar 2007; 18:44 PM, CLOSING

KL Shares end sharply lower; 05 Mar 2007;BERNAMA; 18:44 PM

KUALA LUMPUR, MON: SHARE prices on Bursa Malaysia closed sharply lower today with late buying in a few key counters such as MISC and Petronas Gas helped to narrow earlier losses, dealers said. The market succumbed to heavy losses as selling pressures persisted with weaknesses in regional Asian bourses and Wall Street, dealers said. Genting and Resorts were the major losses.

The benchmark Kuala Lumpur Composite Index fell 53.99 points to 1,110.69.

The Second Board Index lost 6.45 points to 87.98, the Technology Index declined 1.36 points to 26.73, Industrial Index dropped 51.33 points to 2,229.37 and the Finance Index eased 510.68 points to 9,102.20.Of the FTSE-BM Index series, the FBM30 lost 302.01 points to 7,144.38 and the FBMEmas lost 418.37 points to 7,302.65.Losers beat gainers 1,110 to 42 with 42 counters unchanged, 187 untraded and 36 suspended
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UPDATE: 4th Mar 2007

Sunday March 4, 2007
Worst over for stock market, says scholar; By CHRISTINA CHIN

PENANG: The worst is over for the stock market, according to a prominent Yijing scholar here.

Dr Chuah Chong Cheng, who has studied Yijing (I-Ching Book of Change) for the past 30 years, said the recent plunge of the Asian and European markets was the worst that could happen to the stock market this year. A retired lecturer from Universiti Sains Malaysia and now an academic consultant at the Geocosmic Centre of Yijing Metascience Research Malaysia, Dr Chuah had predicted last week's market plunge.

He also assured the people that they need not worry about today's lunar eclipse because it would not carry any negative effect. “The full lunar eclipse is nothing to be feared but, generally speaking, 2007 is a blind year which is not so good. A year is considered 'blind' when the Chinese New Year is celebrated after the beginning of spring, which usually falls on Feb 4. “Malaysians should be prepared for very hot weather and haze. Towards the end of the year there will be another flood.” Worryingly, though, Dr Chuah is predicting another tsunami. “I am expecting a tsunami to hit our shores either at the end of the year or the beginning of 2008,” he said, adding that the tsunami would hit before the general elections.

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Malaysia's Kuala Lumpur Composite Index of stocks fell 1.4 per cent yesterday (Friday, 2nd Mar 7), adding to a 9.3 per cent drop from a 13-year high on Feb 23he Malaysian ringgit posted the biggest weekly drop in more than three months, as a slide in stocks spurred concern that overseas investors will withdraw funds from the nation. Bonds rose. The currency fell for a fourth day after a stockmarket rout starting on Tuesday wiped US$1.5 trillion off markets globally
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The big meltdown: how it could happen Take a leap into the future - it's easy to see then that it was mostly irrational complacency, says PAUL KRUGMAN

(NEW YORK) FEB 27, 2008 Published March 3, 2007

PAUL KRUGMAN, Professor of economics at Princeton University; "In 2007, as in 1987, investors rushed for the exits not because of external events, but because they saw other investors doing the same.

THE great market meltdown of 2007 began exactly a year ago, with a 9 per cent fall in the Shanghai market, followed by a 416-point slide in the Dow. But as in the previous global financial crisis, which began with the devaluation of Thailand's currency in the summer of 1997, it took many months before people realised how far the damage would spread. At the start, all sorts of implausible explanations were offered for the drop in US stock prices. It was, some said, the fault of Alan Greenspan, ex-chairman of the Federal Reserve, as if his statement of the obvious - that the housing slump could possibly cause a recession - had been news to anyone. One Republican congressman blamed Representative John Murtha, claiming that his efforts to stop the 'surge' in Iraq had somehow unnerved the markets.

Even blaming events in Shanghai for what happened in New York was foolish on its face, except to the extent that the slump in China - whose bourses had a combined valuation of only about 5 per cent of the US markets' valuation - served as a wake-up call for investors. The truth is that efforts to pin the stock decline on any particular piece of news are a waste of time. Wise analysts remember the classic study Yale's Robert Shiller did during the market crash of Oct 19, 1987. His conclusion? 'No news story or rumour appearing on the 19th or over the preceding weekend was responsible.'

What made the market so vulnerable to panic? It wasn't so much a matter of irrational exuberance - although there was plenty of that, too - as it was a matter of irrational complacency. After the bursting of the technology bubble of the 1990s failed to produce a global disaster, investors began to act as if nothing bad would ever happen again. Risk premiums - the extra return people demand when lending money to less than totally reliable borrowers - dwindled away. For example, in the early years of the decade, high-yield corporate bonds (formerly known as junk bonds) were able to attract buyers only by offering interest rates 8-10 percentage points higher than US government bonds. By early 2007, that margin was down to little more than 2 percentage points.

For a while, growing complacency became a self-fulfilling prophecy. As the what-me-worry attitude spread, it became easier for questionable borrowers to roll over their debts, so default rates went down. Also, falling interest rates on risky bonds meant higher prices for those bonds, so those who owned such bonds experienced big capital gains, leading even more investors to conclude that risk was a thing of the past. Sooner or later, however, reality was bound to intrude. By early 2007, the collapse of the US housing boom had brought with it widespread defaults on sub-prime mortgages - loans to home buyers who fail to meet the strictest lending standards. Lenders insisted that this was an isolated problem, which wouldn't spread to the rest of the market or to the real economy. But it did. For a couple of months after the shock of Feb 27, markets oscillated wildly, soaring on bits of apparent good news, then plunging again. But by late spring, it was clear that the self-reinforcing cycle of complacency had given way to a self-reinforcing cycle of anxiety.

There was still one big unknown: Had large market players, hedge funds in particular, taken on so much leverage - borrowing to buy risky assets – that the falling prices of those assets would set off a chain reaction of defaults and bankruptcies? Now, as we survey the financial wreckage of a global recession, we know the answer. In retrospect, the complacency of investors on the eve of the crisis seems puzzling. Why didn't they see the risks? Well, things always seem clearer with the benefit of hindsight. At the time, even pessimists were unsure of their ground. For example, Paul Krugman concluded a column published on March 2, 2007, which described how a financial meltdown might happen, by hedging his bets, declaring that: 'I'm not saying that things will actually play out this way. But if we're going to have a crisis, here's how.' - NYT

The writer is a professor of economics at Princeton University

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The great China squeeze; yvia

The problem is that it is still very much a blended economy - both state andmarket driven
By STEPHEN ROACH Published March 2, 2007

LIKE nearly everything else in the world these days, it now appears that global stock market corrections are made in China. I have no idea if the rout that began in China was just a brief flash or the start of something big. But I have long felt that something has to give in China. This may well be the beginning of an important venting process.

Headache: The 9% one-day plunge in Chinese A-shares could certainly be interpreted as a sign that 'inside sellers' played a key role in sparking the decline


The basic premise of this story is that China - despite its remarkable successes on the economic development front - now has a seriously unbalanced economy. The main problem is a runaway investment boom. By our estimates, in 2006, fixed asset investment exceeded 45 per cent of Chinese GDP - a record for China and, in fact, a record for any major economy in the world. By comparison, Japan's investment ratio in the 1960s - the period of maximum rebuilding from the destruction of World War II - never exceeded 34 per cent of GDP. China's annual growth in fixed asset investment has averaged 26 per

cent over the past four years. Should the investment boom continue at this pace, the odds of capacity excesses and a deflationary endgame will only increase. That's the very last thing China wants or needs. The Chinese government recognises the perils of just such a possibility. For nearly three years, it has conducted an on-and-off tightening campaign aimed at cooling down its overheated investment sector. Following relatively limited actions first implemented in the spring of 2004, Chinese authorities have upped the ante in the past eight months. The People's Bank of China has raised its short-term policy rate twice by a total of slightly more than 50 basis points, and beginning in mid-2006 the central bank boosted bank reserve requirements five times in increments of 50 bps from 7.5 per cent to 10 per cent - the last such action taking effect on Feb 25. The problem for China is that it is still very much a blended economy – both state and market driven. As such, market-based policy actions – especially interest rate adjustments - have had only limited success, at best. Two additional factors compound this problem: First, Chinese banks run chronic excess reserve positions; reserves amounted to 14 per cent of total

deposits by year-end 2006 - well above the mandated 10 per cent requirement set by the latest policy action. That means, of course, that recent increases in bank reserve ratios are not a binding constraint on the banking Second, much of China's bank lending remains outside the scope of the central control of its monetary authorities; dominated by a vast and highly fragmented system of autonomous local banks, there is only limited traction

between monetary policy adjustments and broad trends in Chinese bank lending. In light of that disconnect, together with only limited development of a domestic corporate bond market, Chinese macro officials have had to rely largely on 'administrative controls' - namely, a case-by-case project approval mechanism - to rein in the excesses of a runaway investment boom. The results of this effort have been mixed. Courtesy of the administrative edicts issued by the National Development and Reform Commission - the

modern-day counterpart of China's old central planning bureau – investment growth slowed from near 30 per cent at the start of 2006 to around 14 per cent at the end of the year. Unfortunately, bank lending went the other way - actually accelerating from 13 per cent y-o-y growth in mid-2006, when the latest tightening campaign began in earnest, to 16 per cent by December. That, in a nutshell, could well be the key to this story: China's central bank has been unable to get traction on bank credit expansion at the same time the central planners have succeeded in achieving traction in prompting the investment slowdown. This has resulted in an excess of bank-induced liquidity creation that is undoubtedly spilling over into the financial system. As a doubling of the Shanghai A-share index over the past six months suggests, the Chinese stock market appears to have been a major beneficiary of this mismatch. Here's where the story gets especially interesting - and, admittedly, somewhat conjectural. In China, stability is everything. The Chinese leadership believes it cannot afford to lose control of either its real economy or its financial markets. Pure market-based systems can rely on interest rates, currencies, fiscal policies, and other macro stabilization instruments to contain the excesses.

A blended Chinese economy does not have that option. The quasi-fixed currency regime compounds the macro control problem - making it difficult for China to manage its currency in a tight range without fostering excess liquidity creation. That puts the onus on Chinese policymakers to opt for non-market control tactics. Just as China has moved to bring its central planners into the business of containing the excesses in the real economy through administrative measures, I suspect it now feels compelled to rely on a similar approach in order to deal with excesses in its financial system. All this puts the onus on China's financial regulators to face up to the risks inherent in any asset bubble - in the current instance, an equity bubble. That's especially the case in the weeks just before the annual early March meeting of the National People's Congress - always a critical and delicate point in the Chinese policy cycle.

In that context, there were countless rumours of government intervention in the markets on Feb 27. The only such action our China team has been able to verify - and it's an important one - pertains to State-directed sales of its massive holdings of so-called reformed shares. Apparently, on Feb 27 it became public information that various local affiliate holding entities under the SASAC (State-owned Assets and Supervision Administration Commission) have been reducing government stakes in about 15 listed Chinese companies by close to the annual limit of 5 per cent of total outstanding shares. Following the equity market reforms of 2005, these previously unlisted shares have since been classified as market tradable shares – thereby opening the door for actions such as those which became evident on Feb 27.

The 9 per cent one-day plunge in Chinese A-shares could certainly be interpreted as a sign that 'inside sellers' played a key role in sparking the decline - either acting at the explicit request of the government or out of fiduciary conviction that the end was close at hand. Inside selling or not, the bottom line is that China's macro control imperatives are a critical ingredient of its overall stability objectives. And in recent years, risks have been multiplying on the control front. Just as China cannot afford an overhang of excess capacity, it cannot afford a major equity bubble. Lacking in market-based mechanisms to address these problems, the administrative option remains a very important tool in the Chinese policy arsenal. So far, that's mainly been true on the real side of the economy. The near-parabolic increase in the Chinese equity market over the past six months is good reason to believe this strategy is about to be tested on the financial side of the economy.

In the last five years, China has emerged as a major engine on the supply side of the global economy. But with that achievement has come a new set of risks - especially an overheated investment sector and an equity bubble. These two problems are related in that they are both very visible manifestations of China's control problem. The sharp break of share prices on Feb 27 may well be symptomatic of China's increased determination on the macro control front. Ultimately, this is good news for China and the broader global economy - it sets the stage for balanced and sustainable growth. But for those counting on open-ended Chinese growth, any such slowdown could come as a rude awakening. The China squeeze now appears to be on in earnest.
The author is chief economist of Morgan Stanley & Co. This article was sourced from Morgan Stanley's research note, Economic Comment, dated Feb 28

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Stocks rout leads to worst week in over three months for ringgit

Published March 3, 2007

(KUALA LUMPUR) The Malaysian ringgit posted the biggest weekly drop in more
than three months
, as a slide in stocks spurred concern that overseas investors will withdraw funds from the nation. Bonds rose. The currency fell for a fourth day after a stockmarket rout starting on Tuesday wiped US$1.5 trillion off markets globally. Buying by global funds helped drive the benchmark stock index to a 13-year high last week. Emerging-market bond yield spreads over US Treasuries widened this week by

the most since September. 'The ringgit is bearing the brunt of the selling in the stock market,' said Esther Ong, who helps manage US$580 million at Prudential Fund Management Bhd in Kuala Lumpur. 'Some foreign funds have exited and that caused the currency weakness.' The ringgit dropped 0.4 per cent this week, the most since the five days ended Nov 17. The currency traded at 3.5075 against the US dollar as of 5.54pm local time from 3.4935 a week ago, according to data compiled by Bloomberg.

Malaysia's Kuala Lumpur Composite Index of stocks fell 1.4 per cent yesterday, adding to a 9.3 per cent drop from a 13-year high on Feb 23. Emerging-market bond yield spreads gained 21 basis points to 1.86 percentage points on Thursday from a record low of 1.64 points on Feb 22, according to JPMorgan Chase & Co's EMBI Plus index.

Ringgit-denominated bonds headed for a fourth week of gains as local investors shifted funds into fixed-income securities from stocks. The yield on the 3.718 per cent note due June 2012 fell 7 basis points to 3.6 per cent this week, according to the central bank, reaching the lowest in almost 16months. The price rose 0.32 to 100.54. - Bloomberg
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'Market needs time to recover' via

By Chong Pooi Koon March 2 2007
THE stock market drifted down another 15.6 points, or 1.3 per cent, yesterday as investors remained jittery after sentiment was rocked by the recent sharp decline in stock prices across the world. Analysts said the local market was consolidating after an almost

uninterrupted run-up in the last three months or so. They, however, believe that the market's longer- term uptrend remains intact as the country's economic fundamentals have not changed. The benchmark Kuala Lumpur Composite Index (KLCI) fell further to 1,180.9 points, led by losses in utility Tenaga Nasional Bhd, the country's largest lender Malayan Banking Bhd and construction group UEM. "The market will need time to recover. It is entering a consolidation period and it needs to consolidate a while before continuing on the uptrend," head of OSK Research, Kenny Yee, said. Analysts predict that the consolidation period could last a couple of weeks and that share prices will likely continue to fall in the next two days.

"The market is still finding its footing. Investor sentiment has been affected by the recent declines," Yee said, adding that the KLCI support level should be around 1,150 points to 1,170 points. TA Investment Management Bhd chief investment officer Choo Swee Kee said that local share prices had first risen because of institutional and foreign buying, which until a certain level retail investors, too, were encouraged enough to join in to bring the market up to a new level. "But what happened in the last few days has created jitters, and already retail investors nowadays are more easily upset," Choo said. He said that even as the Dow Jones Industrial Average rebounded by some 50 points overnight in the US, investors were not convinced that the market was recovering, suspecting that it could be just a technical rebound. If this fear continues to linger, US stocks will drift even lower, Choo said. And what happened in China creates another concern that the market there cannot go up forever, he added.

"So, along the way, retail investors here have decided to sell, but of course they are more rational now," Choo said. Another group of bargain hunters are emerging, he observed, but overall, the market is still in a net selling mood and share prices on Bursa Malaysia are likely to continue falling in the next two days. Still, analysts are assured that the longer-term uptrend in shares on the local market remains intact given that the country's economic fundamentals are the same, crude oil prices are within the acceptable band and the satisfying corporate earnings are proofs that public- listed companies are growing fairly well.

Citigroup Asia Pacific economist Chua Hak Bin believes that the current stock market correction in the region has little to do with any major shiftin economic fundamentals. He said that while China, Malaysia and Singapore have borne the brunt of the sell-offs so far, these are also countries that have seen the largest absolute foreign equity fund inflows since the start of the year. "This suggest that the selling represents more profit-taking rather than any major vulnerability developing," he said, adding that even before this current market sell-off, there were already signs that the inflows into Asia were starting to taper off since early last month.
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SGX Market Commentary

Not just a bad week for stocks; Analysts say it's a bull market correction, not start of a bear market

By R SIVANITHY SENIOR CORRESPONDENT; Published March 3, 2007; via

TO SAY that it has been a bad week for stocks would be a bit of an understatement - the Straits Times Index (STI) began the week full of promise and with every chance of rising to new all-time highs but, instead, ended a whopping 230 points or 7 per cent lower at 3,078.74.

The trigger: Stock prices tumble at a stock exchange in Chengdu, in China's Sichuan province. This week's meltdown in Asia came from China, where stocks on Tuesday plunged 9 per cent on worries that the government might introduce anti-speculative stock market measures

A meltdown in China combined with computer glitches here and on the New York Stock Exchange to bring the sellers out in force. The result: the index fell on four consecutive sessions, making it the worst week for stocks since May 2006. The trigger to sell came from China, where stocks on Tuesday plunged 9 per cent on worries that the government might introduce anti-speculative stock market measures. This, in turn, brought Wall Street to its knees - the Dow Jones Industrial Average collapsing a jaw-dropping 545 points at one stage on Tuesday. The outcome since then has been a huge spike in volatility throughout all markets. As far as investors in this part of the world were concerned, Hong Kong and China set the pace and with both markets fluctuating wildly from Wednesday to Friday, it made for heart-stopping sessions for the local market. Between Tuesday and Friday, the STI routinely ran through 100-point bands, with Wednesday's intraday loss of 193 points perhaps the most astonishing. In yesterday's session, the index opened 35 points weaker, recovered all of this to move 10 points into positive territory before falling back to a net

loss of 13.84. Banks, property and SingTel have been the main index drivers throughout the week with the banks, probably suffering from 'buy in anticipation, sell on news', having run up sharply ahead of their results. In yesterday's session though, UOB and OCBC managed a semblance of a bounce but not so for property heavyweights CapitaLand and Keppel Land. The Singapore Exchange, in the meantime, saw its shares drop 25 cents to $6.50 on heavy volume of 22 million units. Meanwhile, the second line underwent a roller-coaster ride, as violent as their blue-chip counterparts with some spectacular moves for traders to latch on to. Indofood, Cosco Corp, China Fishery, Genting International and many other recent favourites posted large price moves in either direction, giving day traders ample opportunity to test their timing skills.

Throughout the week, analysts and various experts maintained that this is a bull market correction and not the start of a bear market. Henderson Global Investors, for example, yesterday said China is sitting on US$1 trillion of foreign exchange reserves and generating US$200 billion per annum current account surpluses, so there is no real risk of a more general financial crisis or lasting contagion in the region. 'We expect volatility within the Asia-Pacific region, especially in China and Hong Kong, to continue in the short term. However, we remain overweight in both countries as we believe the long-term story is a positive one. As the dust settles and sentiment improves, we will be looking to buy into both these markets, while looking for other good buying opportunities elsewhere within the region,' said Henderson.

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Jittery Wall Street braces for more volatility via

By ANDREW MARKS IN NEW YORK; Published March 3, 2007

WITH Asia's markets still in turmoil and equities in Europe suffering another round of losses, the US market started yesterday with another decline.

"We're going to be on a see-saw for a while, depending on what happens in Asia.' - Bill Evanesky

An earnings warning before the market opening from Dell didn't help soothe market jitters, as the Dow Jones index sank by 26 points, or 0.22 per cent, just before 10am. Both the S&P 500 and Nasdaq were trading down as well. The question that Wall Street will be asking over the short term will be whether the broader market volatility is merely a distraction that should not ultimately detract from the still-solid fundamental picture, or if

Tuesday's dramatic sell-off was the wake-up call to investors - warning of the increasing risk that market fundamentals both in the US and abroad could collapse. 'We've stopped the heavy bleeding, and now we're just trying to regain a sense of calm,' said Paul Nolte, director of investments with Hinsdale Associates. 'Now, we're tied to all of the markets overseas, and we'll be constantly watching them.' Wall Street will also be watching to see what the current and former chairmen of the Federal Reserve have to say about market conditions. Indeed, the debate over fundamentals has been personified this week in the contrary perspectives offered by Ben Bernanke (see BELOW) the current Fed chairman, and Alan Greenspan, the former and long-time head of the US central bank.

Mr Greenspan twice this week - in private, paid sessions with investors - said that it's at least possible the US will dip into a recession later this year. His gloomy assessment seemed to contradict current Fed chief Bernanke's statement that the economy remains on track for a soft landing, and that economic growth should in fact accelerate by the fourth quarter. Ryan Beck & Co's chief investment strategist Joe Battipaglia says the short-term fate of the market 'is not an easy call at this point'. He said: 'Here in the US, people are debating whether a soft landing scenario or a recession for our economy is more likely this year, and in China if that stock market has big problems or was just blowing off a little steam in the midst of its incredible rise. Investors will need some time before they vote with their money.'

On the bullish side is the ongoing liquidity boom. Investors have a lot of money to put into play, and with the expected operating earnings yield for the S&P 500 for the next four quarters around 6.9 per cent, stocks are still undervalued by almost 30 per cent with the 10-year note yield at current levels. Perhaps that accounts for the relatively high degree of complacency shown among investors and portfolio managers despite the market's plunge. 'There does seem to be a sense that the bull market will weather this storm and come out of it intact,' Mr Battipaglia said. 'But is that more sentiment than an analysis of market fundamentals, which is a pretty fragile leg to stand on when stocks have had such a big run-up?' he asked, warning that if sentiment does reverse, stocks could be set up for another big tumble incoming weeks. For Mr Battipaglia, the answer is a positive one.

'I think we'll be back on solid ground soon. We're not out of the woods yet by any means, but I think we'll be OK,' he said. Bill Evanesky, a specialist on the New York Stock Exchange trading floor, said: 'We're going to be on a see-saw for a while, or a roller coaster, depending on what happens in Asia, as investors try to sort out the risk here .'A roller coaster, indeed. Stocks plunged at the opening on Thursday, including a dive of more than 200 points in the Dow Jones Industrial Average. However, a solid report on the factory sector helped a comeback that saw blue chips soar into the green at about 2:00pm before slipping back into negative territory and closing with a loss of 34.29 points, or 0.28 per cent, at 12,234.34.

= = = =see also H E R E ON

Malaysia's Economy 2006 Expands 5.9%; US Slow Growth Curbs Export; Opposition Wants Govt To Cushion Losses; Bursa Malaysia: Market Fall A 'Healthy Correction'


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