Bank Indonesia (BI) says it will be watchful over potential spillovers from the stock market crash in China that might affect the outlook of capital flows in Asia, eventually harming the regional currencies
ank Indonesia (BI) says it will be watchful over potential spillovers from the stock market crash in China that might affect the outlook of capital flows in Asia, eventually harming the regional currencies.
BI Governor Agus Martowardojo has warned that the deep fall of equities in China, where stock prices have plunged 30 percent in a month, might affect the real sector of the world's second-largest economy and spell negative repercussions to Indonesia.
'We must brace for impact because China is the epicenter of economic growth in the region,' he said during a breaking of the fast event with reporters on Wednesday evening.
'Given the interconnectivity between the countries today, this [the China stock market crash] could pose risks, particularly from the currency side, which have to be anticipated,' the BI governor added.
The Shanghai and Shenzhen indices in China, initially among the best performers this year, saw fund outflows of at least US$3.5 trillion in what analysts say is the worst market slump on the mainland since 1992.
The selling pressure in China had been so severe that on July 8, about 1,300 companies halted trading in their stocks on mainland exchanges, freezing $2.6 trillion worth of shares, or 40 percent of the stock market capitalization, Bloomberg reported.
Agus noted that the sell-offs in China could be a rational adjustment of price valuations among investors, as he argued that the country's stock market climb earlier this year was not justified from a fundamental perspective.
When hitting a record-high level of 5,166.3 on June 12, the Shanghai Composite Index surged 60 percent compared to earlier this year, a feat that might look perplexing as Chinese economic growth slumped to a six-year low level of 7 percent in the first quarter.
'What's happening in China will have a greater impact on our economy rather than developments in Greece,' said senior deputy BI governor Mirza Adityaswara.
'What we should be vigilant of is the possibility that the situation in the Chinese stock market might spell to its real sector,' Mirza cautioned. 'If so, then our exports will be impacted.'
China is Indonesia's largest trading partner, absorbing $16.5 billion worth of exports from the archipelago throughout last year, data from the Central Statistics Agency (BPS) show.
The economic linkage between the two countries was so strong that every 1 percent growth slowdown in China would deduct growth in Indonesia by up to 0.5 percent, according to estimates from the International Monetary Funb (IMF).
'Impact of China could affect commodity exporters; Indonesia, Malaysia and Thailand, while Singapore's financial linkages with China bear watching,' JPMorgan Chase economists Sin Beng Ong and Benjamin Shatil wrote in a research note released on Thursday.
Despite heightening worries, Sean Yokota, an analyst with Swedish investment bank SEB, assured that there should not be excessive concerns about contagious effects from the Chinese stock market crash.
China also implemented a 'closed capital account' in its economy, meaning the country did not have to impose capital controls like Greece to protect its own financial system, he argued.
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