My Blog

March 20, 2008

Yesterday I noted that there were lots of rumors in the market of a cut in the stamp duty as a way for the government to prop up share prices.  In my posting I wrote:

Earlier last week Minister of Finance Xie Xuren said public discussions about cutting the stamp duty had been noted and the ministry would “seriously consider” readjustment of the tax.  As a shareholder in the Shanghai B-share market of course I personally support any move to increase the value of my shares, but the finance guy in me is not as eager to see this happen.  Every time government authorities change policies in order to push the market up or down they are simply reinforcing the idea that the Chinese stock markets are not a machine for allocating capital so much as a machine to achieve the immediate political objectives of the government.  I don’t think there is anyone left in China who believes that an investment strategy should be anything other than a strategy to figure out the government’s next move, but if there is, this’ll show him.

Today the rumors about a repeal or reduction in the stamp duty were so strong that the markets reversed morning losses of nearly 6% to finish up 3% for the day.  That’s a pretty big swing, and it shows how vital government actions are to the stock market here in China.  Not a good thing.  

In general there are pretty widely felt expectations that the government wants to see the market behave well during the next few moths as it grapples with a series of domestic and external problems, including of course rising inflation in China and a slowing US economy.  I suppose we don’t need to see more carnage in the local stock market while all these other problems have to be resolved.

In addition to the rumors of a repeal of the stamp duty, a release jointly issued today by the Ministry of Finance and the State Administration of Taxation said that mutual fund companies will get a temporary tax exemption in their stock investment income in China.  The notice said that tax-exempt items include fund companies' profits from stock and bond trading, dividends, and bond interest.  All of this is good news for the fund companies and a pretty clear signal that the government is indeed concerned that the market correction has gone too far.

I had originally planned to close out my stock positions in March to avoid the pre-Olympic sell-off, but given that we’ve corrected by nearly 40% from the November peak, I guess I am not too worried that there will be a further big sell-off.  In fact given government worries about the market and the large and perhaps rising amount of foreign currency inflows, which will add to domestic liquidity, I think there is a reasonable chance that we may see a pretty strong market for the next month or two.

Speaking about foreign currency inflows, the PBoC released a report today worrying about capital inflows.  I have not yet seen the translated version of the report, but China Daily (headline: “Huge capital influx poses hazards”) describes the report like this:

According to the report, the flood of international capital coming into emerging economies undermines the stability of their currency values. Mounting foreign exchange reserves complicate their monetary measures, while irregular and speculative moves in short-term capital make macroeconomic control tougher.

…The global liquidity problem may stay for a while, said the report, as major developed nations may continue to relax monetary regulation. Furthermore, the Fed could possibly cut interest rates again and some developing economies are expected to pursue looser monetary policies as well

All of this is true enough, and I wonder if the PBoC and others are gearing up in public their explanations of why China is suffering from a monetary problem.  Is this for the benefit of the newly installed leadership?  If capital inflows are really the problem, then they must be addressed, right?  Unfortunately I think the instinct of Chinese political authorities is to address problems with heavy-handed administrative measures – making capital controls, for example, more binding.

On a very different note, my student Liu Bing found the following article in a local business newspaper and translated it for me.  I thought it was interesting because it shows the complexity and difficulty of this whole pork business:

The Distortion of Pork Price --The Rich's Business

In the past, farmer raised pigs because there were not too many people with good jobs, but now most of the young workforce went to in the urban cities, instead of raising pigs, they become consumer of pork in the city (I heard an estimation that this number can be as large as 250 million people )

Although the pork price almost doubled compared two years ago, the farmers still can't make a profit by raising pigs. A baby pig's price is 1000 yuan on average, considering the fodder price and other fees, and the selling price of pork is 7.8 yuan per 500g, which is almost the half of the pork price in the city's supermarket (as there are several layers of pork dealers in the middle and the transportation and other fees), the profit of raising a pig can be as much as 400 yuan per head.

The blue ear disease killed about 10 thousand pigs in 2007 according to the official release statistics, but according to an officer in the Chongqing Pig Feeding Research Institution, the circumstance he saw is 30% of the pigs died of this disease. Of course, the snow storms worsen this situation.

Although there is subsidy from the government, for farmers, the risk of raising pigs is still too high.  About 70% of the supply of pigs comes form household's raising. The pig raising industry is far from institutionalized (only about 10 thousands entities who are feeding more than 100 pigs around the country).

This is a distorted business.  Only the farmers who raise pigs take on both the market risks such as the fluctuation of price and the raising risk like the death of pig. The other people who deal in pork assume almost no risk. This pig raising business can only be profitable if it is institutionalized and has economies of scale.

Comments (2) for "Tax repeal rumor caused a re...

hi Michael, you mentioned, "I think there is a reasonable chance that we may see a pretty strong market for the next month or two." Do you really think so even with the possible recession of US? By Wenqing Liou - 3/20/2008 9:20 PM

There are pretty limited fundamental links between the US economy and the Chinese stock markets, the latter being driven largely by local liqudity, levels of real interest rates, and government action. I think all three of those factor might turn positive in the next couple of months, but of course we are living with so much uncertainty right now that I would say the probability of being wrong is pretty high. By Michael Pettis - 3/21/2008 2:31 PM