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Published on April 2, 2008

On Monday, the Shanghai Composite Index plunged by as much as 34 per cent in one day, the largest drop in 15 years. In Hong Kong, not since September 11, 2001 has the exchange rate slid by 17.85 per cent. Such are the effects of the imminent US recession, resulting in waves of global market panic.

The "big correction" in Chinese equities is a much-welcome event, particularly for Aberdeen Asset Management's director of Asian equities Peter Hames.

Although Hames believes there is a bubble ready to burst, certain Chinese stocks, mostly financials and telecommunications, still have profitable runs. Despite the volatility, there are good companies with strong balance sheets and management, he said.

The well-being of China's equity market is something of a litmus test for the region. Many analysts have revised Asia's GDP growth from last year's robust 8.8 per cent to around 7 to 7.5 per cent.

In fighting escalating inflation, the Chinese central bank has one arm tied behind its back. Hames said the fixed exchange rate made adjusting interest rates difficult.

To curb inflation, the Chinese government has used various measures such as increasing the deposit reserve requirement for commercial banks to a historic 15.5 per cent and freezing energy prices, at least in the short term.

China as a whole though still has a long way to grow, said Jotika Savanananda, CEO of TMB Asset Management.

The government's policies to herd development towards the inner land-locked region would ease the overheating in coastal areas, she said.

Contrary to Aberdeen, which deems A shares as having "crazy valuations", Jotika believes these mainland-listed stocks provide more investment choices.

The main story for the region will continue to be that of domestic consumption, which has been cushioning it from the US slow burn.

Hames looks to Asian companies that are doing much business within the region too, such as Singaporean bank OCBC and property developer City Developments - both expanding aggressively in Indonesia, as well as in Malaysia, Vietnam and China.

Although China is still a strong player, other emerging markets, such as Brazil and India, have liberated investors with more diversification of choice.

Ki Nan Tsui

The Nation