Dow Average Falls 416 Points After China Sell-Off

February 28, 2007 Dow Average Falls 416 Points After China Sell-Off By JEREMY W. PETERS and DAVID BARBOZA Stocks plunged in New York today after a sell-off in China rattled markets worldwide and surprisingly weak economic data fanned fears that the economy may be more vulnerable to a downturn than widely thought. The broadest measure of stock prices, the Standard and Poor’s 500 stock index, lost nearly 3.5 percent of its value today, its biggest drop in three and a half years. The Dow Jones industrial average fell 3.3 percent, or 416.02 points, to 12,216.24. A wide sell-off had pushed the S&P and the Dow down about 1 percent for most of the trading day. But minutes before 3 p.m., stock prices suddenly plummeted, sending the Dow briefly down more than 500 points, or 4 percent. The S&P also fell about 4 percent at the time. Both indexes later regained some of their value, but their gains for the year had been wiped out by today’s close. For much of the past year, stock prices have risen steadily as the economy appeared to be holding up despite a significant slowdown in growth. But that sense of optimism among investors took a mighty blow today. “It was sort of one of those days where somebody snaps their fingers, and the market’s hypnotic trance is over,” said Stuart Hoffman, chief economist of PNC Financial. “We’ve had this, ‘What me worry?’ mentality. And this is a little bit of a wakeup call.” Ethan Harris, the chief United States economist for Lehman Brothers, said the stock sell-off combined with a run-up in bond prices was a classic reaction from investors who are looking to minimize their exposure in a stock market downturn. Experts noted that three factors appeared to have stoked the panic on Wall Street today. The situation in China and a weak report on durable goods orders in the United States were likely the two major factors. But nervousness over the possible economic impact of rising defaults among high-risk borrowers, known as sub-prime borrowers because their credit histories are often spotty, was also adding to the unease, analysts said. After China’s stock markets reached record highs on Monday, they plummeted today in one of the biggest sell-offs in their history. Analysts said there was no single reason for the plunge, but many have cautioned for months that China’s volatile, roller-coaster market, which has been soaring almost nonstop for more than a year, appeared vulnerable. The plunge in Chinese stocks had global reverberations. Stocks fell across Europe, with the major indexes in France, Germany and Britain all dropping more than 2 percent. In the United States, trading got off to a bad start and stayed that way. The benchmark Shanghai Composite index, which had passed the 3,000 milestone on Monday after the weeklong Chinese New Year holiday, shed 268 points, or 8.8 percent, to close at 2,771.79. The smaller Shenzhen Component index fell even further, dropping 797.87 points, or 9.3 percent, to 7,790.82. Share prices tumbled elsewhere in Asia, although not nearly as much. Hong Kong’s benchmark Hang Seng index dropped 412.94 points, or 1.8 percent, to 20,095.01. In Japan, the Nikkei fell 95.43 points, or 0.5 percent. The wave of selling then spread to Europe, and later to the United States, where a government report showed that orders of durable goods — big-ticket items that include washing machines, airplanes and semiconductors — declined more than expected in January. That hastened the sell-off on Wall Street. Chinese share prices have swung wildly in recent months, rising on huge interest from largely inexperienced retail investors in soaring stock prices, then falling on stern Chinese government warnings about “blind optimism” in the market. The unmistakable trend, however, has been up. Share prices on the major Chinese indexes climbed more than 100 percent last year, ending a five-year stock slump. It is too early to tell whether the decline today constitutes a healthy correction in China or the opening act of a broader collapse. Some analysts said that rumors about new taxes on capital gains spooked some investors. Particularly hard hit were more liquid, big-cap stocks, which weigh heavily on stock indexes. “It’s obvious that a large amount money was being pulled out of the market from big-cap stocks,” said Wu Jianxiong, an investment strategist at Guotai Junan Securities in Shanghai. Stephen Green, a senior economist and stock market analyst working in Shanghai for Standard Chartered Bank, said the market fundamentals had not changed drastically in recent weeks, adding that the stock markets in China tended to be volatile, particularly after reaching all-time highs. “People are just on edge,” he said. “It’s very possible in two weeks we’ll be right back up there.”