By Debasish Roy Chowdhury (China Daily)
Updated: 2007-08-14 11:53

Contagion

But what happens if Wall Street crashes? Because of its close connection to the US financial market, won't Hong Kong be hit as well in that case? And if Hong Kong catches cold, how long will it be before Shanghai sneezes?

Chen Xingdong, chief economist of BNP Paribas Peregrine Securities Ltd, admitted that Hong Kong may take its cue from Wall Street but maintained Hong Kong might be hurt a little less this time because of the mainland money circulating in its market.

"As for mainland investors, they are relatively inward-bound, their money is still largely in Shanghai. Hong Kong and Shanghai are still loosely related."

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Ma goes a step further. According to him, A-share and H-share markets react to different stimuli. "The mainland market is driven by liquidity and company earnings. The H-share market is dominated by foreign investors. If you look at recent share movements, you'll see Shanghai and Hong Kong are, in fact, negatively correlated."

Ricky Tam, chairman of Hong Kong Institution of Investors, also points out this tendency of Hong Kong and Shanghai exchanges to swing in opposite directions. "Despite the increasing contacts between Hong Kong and Shanghai, the effect on the mainland will be minimal. If Hong Kong keeps going down, Shanghai may of course be eventually affected, but not that much."

Professor Raymond So of Chinese University of Hong Kong, like BNP's Chen, believes even Hong Kong may not be affected that much. "Though the international markets are more integrated than ever before, markets are still ruled by fundamentals. Hong Kong companies are making money and the economy is in good shape."

But So added a rider to his upbeat outlook. "If US companies lose money in subprimes, they will go back to their investment funds for redemptions. Fund managers will then have to sell their stocks to raise the cash demand. When they start doing that, they will sell international stocks as well. So even if Hong Kong or Shanghai shares are fundamentally strong, their prices will start falling."

Long-term worries

But more than a possible, eventual slide in share prices, So is worried about the long-term impact on Chinese exports. "Subprime is essentially an American crisis. But if the US economy is hurt, American demand for foreign goods and services will slow down," he said.

Chen also pointed out that more than 30 percent of Chinese exports head for the US, and that's the real potential headache for China as far as the subprime saga goes.

But Ma believes even that is not a big problem. "Chinese exports have become less reliant on US. Europe is now a bigger market," he said.

"We have calculated that a 6 percent slowdown in Chinese exports may result in a 1 percentage point slowdown in Chinese GDP. But even in the case of a bigger slowdown, China can exercise its options to stimulate the economy."

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