x Abu Dhabi, UAEFriday 21 July 2017

China fears punish 'emerging' stocks

China's move to scrap certain tax rebates, which raises concerns that further tightening measures are likely, is pushing down emerging market stocks around the world.

China's move to scrap certain tax rebates, which raises concerns that further tightening measures are likely, is pushing down emerging market stocks around the world. The MSCI Emerging Markets Index lost 0.9 per cent to 959.38 late yesterday afternoon in Shanghai, extending Tuesday's 1.1 per cent drop. Angang Steel, the biggest Chinese steel maker traded in Hong Kong, slid 3.8 per cent after the government said it would remove export tax rebates on some steel and metals products, prompting concerns that tightening measures were being extended to commodities from the property industry to curb overcapacity.

Not all analysts believe the latest developments bode poorly for emerging markets. "Its a one-off event. There's much more to the China growth story than the tax rebate. If anything, the purchasing power is gradually going to be increasing in China in the next few quarters," said John Sfakianakis, an economist for Bank Saudi Fransi in Riyadh. "There's enough of an indication that China is confident of its growth, and that should be a good indicator for Asia's growth in the coming year."

There was also an unexpected drop in US home sales, prompting speculation that global growth was slowing as well. "The global concerns are not going to be addressed overnight," said Jagannadham Thunuguntla, the chief strategist at SMC Capitals in New Delhi. "There is no real conviction and confidence among investors to put in more money at higher levels." The Shanghai Composite Index dropped 0.8 per cent, extending its annual loss to 22 per cent.

The gauge had gained in the previous two days after the central bank said it would make the nation's currency more flexible, boosting speculation the yuan would strengthen and reduce the need for interest-rate increases to tame inflation. "The tightening measures that have already been put in place aren't likely to be reversed or eased in the short term," said Dai Ming, a fund manager at Shanghai Kingsun Investment Management and Consulting.

* with Bloomberg