Bear in a China Shop
Mar. 1st, 2007 12:59 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksIt was interesting to read the various takes on the 9% fall in the Shanghai stock index on Tuesday. Analysts and newspaper columnists alike hate to have to shrug their shoulders and say that "these things happen; it was well overdue". And so they scramble around for a concrete "cause".
John Authers, whose analysis in the FT I usually admire, took the view that "in spite of the chronological sequence of events, the cause lies in the US, not in China". He forecast that the world's attitude to risk was changed significantly as a result of the fall. Safe havens, he implied, were back.
Now, I don't actually agree with this interpretation, but it's definitely an interesting line and I admire Authers for taking it. His view was that China, which exports masses of stuff to the US in return for pieces of paper that are gradually deteriorating in value (i.e., the US dollar) is a leveraged play on the US consumer. So, when traders saw that there were scary rises in the levels of default in the subprime lending in the US, they concluded that this meant a big fall-off in demand for Chinese "stuff", and therefore Chinese stocks were rapidly sold off.
A more common line of analysis was that the global sell-off was a reaction to the sell-off in China because China could no longer be considered an emerging market. If you reclassify China alongside Japan, Europe and the US, then an 8% sell-off would be expected to cause repercussions elsewhwere. And the falls in the UK and the US were more in line with this than with the "fundamental" cause being in the US.
But, why the sell-off in China? I don't really buy this "leveraged play" as an explanation. Sure, China is correlated with the US consumer's appetite for spending, but its stockmarket valuations were only partially correlated to the strength of US demand. Proof of this can be seen in the relative performance of the Chinese markets in 2005 (when it fell) and 2006 (when it rose 130%). US demand was strong in both years.
No, China was, basically, overbought in a dotcom-style "China is hot" kind of way, mainly by domestic rather than international investors, and mutterings in state-controlled newspapers had indicated that the Chinese government thought that the stockmarket was overbought. If the pullback follows the path travelled by the Nasdaq from late 200 onwards, we can expect further falls and a lethargic Shanghai index for 30 to 36 months.
The question that raises is, would that push the rest of the world into a recession? That is no longer as stupid a question as it sounds. But my immediate reaction would still be, no, it wouldn't. Not least because the Chinese government has consistently shown a shrewder understanding of the vagaries of the markets and of capitalism than have the governments in mainland Europe, the UK and the US. The Chinese government would quite like to see a "flat" year, and it has several means by which to achieve this.
Now, here we come to the interesting question of "who has more power, the traders or the government?" When currency traders took against the pound in 1992, Norman Lamont walked along blithely assuming that the Bank of England was on a par with the Bank of Japan when it came to the ability to move markets. Of course, it wasn't; this was a bit like comparing Chelmsford Town to Manchester United (no disrespect to Chelmsford intended). If the markets really took against Chinese stocks, then the Chinese government might find it a bit harder to engineer the "soft landing" in its stocks than it anticipated.
But the reaction of the past couple of days seems to indicate that it's mainly been seen as a "tremor" rather than a full-blown quake. The world is a different place now than from 1987, although I am seeing worrying reminders of the fervour for junk bond buyouts in the current craze for private equity. There might be some bad times down the line, but I don't see it for this year.
John Authers, whose analysis in the FT I usually admire, took the view that "in spite of the chronological sequence of events, the cause lies in the US, not in China". He forecast that the world's attitude to risk was changed significantly as a result of the fall. Safe havens, he implied, were back.
Now, I don't actually agree with this interpretation, but it's definitely an interesting line and I admire Authers for taking it. His view was that China, which exports masses of stuff to the US in return for pieces of paper that are gradually deteriorating in value (i.e., the US dollar) is a leveraged play on the US consumer. So, when traders saw that there were scary rises in the levels of default in the subprime lending in the US, they concluded that this meant a big fall-off in demand for Chinese "stuff", and therefore Chinese stocks were rapidly sold off.
A more common line of analysis was that the global sell-off was a reaction to the sell-off in China because China could no longer be considered an emerging market. If you reclassify China alongside Japan, Europe and the US, then an 8% sell-off would be expected to cause repercussions elsewhwere. And the falls in the UK and the US were more in line with this than with the "fundamental" cause being in the US.
But, why the sell-off in China? I don't really buy this "leveraged play" as an explanation. Sure, China is correlated with the US consumer's appetite for spending, but its stockmarket valuations were only partially correlated to the strength of US demand. Proof of this can be seen in the relative performance of the Chinese markets in 2005 (when it fell) and 2006 (when it rose 130%). US demand was strong in both years.
No, China was, basically, overbought in a dotcom-style "China is hot" kind of way, mainly by domestic rather than international investors, and mutterings in state-controlled newspapers had indicated that the Chinese government thought that the stockmarket was overbought. If the pullback follows the path travelled by the Nasdaq from late 200 onwards, we can expect further falls and a lethargic Shanghai index for 30 to 36 months.
The question that raises is, would that push the rest of the world into a recession? That is no longer as stupid a question as it sounds. But my immediate reaction would still be, no, it wouldn't. Not least because the Chinese government has consistently shown a shrewder understanding of the vagaries of the markets and of capitalism than have the governments in mainland Europe, the UK and the US. The Chinese government would quite like to see a "flat" year, and it has several means by which to achieve this.
Now, here we come to the interesting question of "who has more power, the traders or the government?" When currency traders took against the pound in 1992, Norman Lamont walked along blithely assuming that the Bank of England was on a par with the Bank of Japan when it came to the ability to move markets. Of course, it wasn't; this was a bit like comparing Chelmsford Town to Manchester United (no disrespect to Chelmsford intended). If the markets really took against Chinese stocks, then the Chinese government might find it a bit harder to engineer the "soft landing" in its stocks than it anticipated.
But the reaction of the past couple of days seems to indicate that it's mainly been seen as a "tremor" rather than a full-blown quake. The world is a different place now than from 1987, although I am seeing worrying reminders of the fervour for junk bond buyouts in the current craze for private equity. There might be some bad times down the line, but I don't see it for this year.
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
Date: 2007-03-01 02:16 pm (UTC)Yay, I corrected an error in Pete B's financial post ! Tune in later for my stock tips.
Andy.
City? Walter Mitty!
Date: 2007-03-01 02:59 pm (UTC)And of course they play at Billericay Town. What next? Billericay City?
Talk about delusions of grandeur. :-)
PJ
Chinese Stampedes
Date: 2007-03-01 03:52 pm (UTC)Re: City? Walter Mitty!
Date: 2007-03-01 05:01 pm (UTC)No one seems to have realised that you could officially name it a supermetropolis and it would still be a bit of a dump.
Andy.
Re: City? Walter Mitty!
Date: 2007-03-01 10:23 pm (UTC)Even by Essex standards?
Re: Chinese Stampedes
Date: 2007-03-01 10:37 pm (UTC)Even I can stand up and say people should do this and not do that. Not at the moment, obviously, because I'm blind drunk. But the principle holds.
I think you are failing to recognise a fairly basic fact about China. If you are a member of the Mandarin nomenklatura (cadres, long-walkers, call it what you will), you can get away with absolutely anything you want. Intuition, deduction, quantum fusion, you name it. If it involves a (state sponsored -- yikes!) bank, then so much the better.
If, on the other hand, you're just a poor sod who sold over-priced medicinal ants to the masses at a profit of £200 million, then, yes, you get shot in the back of the head. But it was nice while it lasted.
Now, if he'd been *really* sensible, he'd have brought in a venture capitalist to, um, float the ants. Did I say venture capitalist? I'm sorry, I meant a member of the Mandarin Nomenklatura.
I suspect you may see an awful lot of "counter-intuitive" activity in the Middle Kingdom over the next eighteen months. And beyond.
Re:All roads lead to Chelmsford
Date: 2007-03-03 12:42 pm (UTC)John H.
http://my.opera.com/fiendishgames/blog/
Re: All roads lead to Chelmsford
Date: 2007-03-03 02:20 pm (UTC)As to county towns with decent football teams. Hmm, that's not an easy one. Not many, methinks.
PJ
Re: Chinese Stampedes
Date: 2007-03-03 02:23 pm (UTC)The long-walkers are now all just about gone, but the system (kind of) remains, with CEOs shuffled around rather like ministers in the UK government. In the past decade the habit remained of banks to lend out money which they had very little hope of getting back (but which they had to lend out, because the borrowers were politically important). To get round this bad loan problem, why not float the banks to foreigners? Inspired, I call it. Foreigners are so desperate to get a foothold in China that they are willing to pay money for banks which, in any other country, would rightly be termed basked cases.
PJ
Re: All roads lead to Chelmsford
Date: 2007-03-05 05:07 pm (UTC)Or cheating, by using http://www.hippy.freeserve.co.uk/ukcities.htm
Chelmsford is not listed as a city. I stand corrected; I thought it was. It's difficult to understand why St. Albans should qualify as a city and Chelmsford should not.
John H.