From today's South China Morning Post, "Stock market returns have generated more than 20 per cent of the first-half profits for mainland-listed companies that have reported interim results so far, according to a report, underscoring concern that the recent earnings-driven domestic market rebound is ungrounded."
I had been hearing rumors all year that a significant source of corporate profits had been from speculating on the stock market but I hadn't yet seen any numbers. For many the logic for continued speculation seems pretty strong -- insider activity is extremely profitable and there are few real restrictions on the ability of corporate treasurers to trade on their own and shared insider information. This makes it seem like a money machine.
My guess is that unless the financial authorities take strong countermeasures (unlikely), for the rest of the year we are going to see the market caught in a virtuous circle of stocks rising on stronger earnings, and rising markets leading to greater speculative profits and so stronger earnings.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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December, 2007
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