U.S. News

China Makes A Market

By Scott Reeves

China's crackdown on illegal IPOs and margin trading are needed reforms that will strengthen investor confidence and don't signal trouble ahead for emerging markets that will drag down  markets in the U.S. and Europe, analysts say.

"This looks like a needed and healthy correction," says Alec Young, equities strategist at S&P Equity Research in New York. "There’s no reason to believe U.S. market is going to fall more than 5% to 7%, a healthy pause that refreshes. But it depends what happens on global growth."

Shanghai's stock market fell almost 9% Tuesday, triggering deep losses on equity markets around the globe. Trading curbs -- a rare event -- were imposed at the New York Stock Exchange.

Allen Sinai, chief global economist at Decision Economics, told CNBC's "Morning Call" that investors shouldn't panic because of Tuesday's market downturn.

"All the stock markets around the world have been frothy and ahead of themselves," Sinai said. "The fundamentals are excellent in terms of economy, in terms of expansion. Longer run, investors should not panic. Shorter run, different, I think we’ve got some trouble to go -- simply markets getting ahead of themselves, too high, too fast, too frothy. Chinese authorities are going to have to get a little tougher and stop some of the rampant speculation that’s going on there."

Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, says Asian currencies didn’t sell off as might have been expected.

"While acknowledging the magnitude of Tuesday’s losses, it seems too early to conclude that it is a repeat of last May and June’s swoon," Chandler says. "For good and for bad, the take away lesson from last May and June, like it was for U.S. equity investors in the late 1990s, is not to panic and to view pullbacks as a buying opportunity."

Asian markets fell throughout May and June last year and experienced their biggest monthly decline since September 2002 on fears China’s economy had overheated on to rebound.

China has set up a special task force to halt illegal stock offerings and banned margin trading -- healthy reforms,  but the government has a long history of micro-managing -- or, some would say, meddling -- in the markets and economy. The concern is that the National People’s Congress, China’s legislative body, will overstep needed efforts to address fears of a stock market bubble and cool the economy.

But Chandler warns that a prolonged skid in global equity markets will destroy excess liquidity that central banks have had difficulty reining in. The market swings sharply between "greed" and "fear" and if the downturn persists, capital preservation becomes the key consideration, he says.

Ashraf Laidi, an analyst at CMC Markets, was less optimistic.

"You’ve got weak growth in the global generator, which is the US and because there is a bubble in China, that could lead to a retreat in that country and the rest of the world," he says.