My Blog

July 16, 2008

The stock market had another bad day today, with the SSE Composite trading more or less straight down to 2657, before rallying in the last 30 minutes to close at 2706, down 2.65% for the day.  According to Bloomberg, China has overtaken Vietnam to become the world’s worst performing stock market year to date.

Several things drove the decline.  The market is still very worried about the threats of a slowing economy and rising costs, and their impacts on corporate profits.  On the positive side, this has seemed to suggest in the past that the authorities would loosen up on money and credit conditions.  But the market is also nonetheless very concerned that the financial authorities will maintain a “tight” monetary policy – i.e. raise interest rates, hike minimum reserve requirements, or otherwise constrain lending growth.  According to today’s China Daily, “Chinese shares declined for the second day on Wednesday, led by property developers and banks on concerns they would be further pressured by the continuing tightening monetary policies.”

There continues to be a lot of confusion about government intentions.  Recent statements by several very senior leaders seemed to suggest that they were downgrading inflation as their top concern and turning more worriedly to slowing economic growth.  I still think this to be true, but the RMB has continued to rise and we continue to hear very hawkish statements about inflation and the currency.  We get a bunch of economic data tomorrow, and I hope these new numbers will provide us with a better sense of what is happening in China.

As an aside I had lunch with a group of investment bankers today to discuss monetary policy and financial risk.  At one point, perhaps a little impatiently, one of them turned to me and said, “Look. I am a very direct woman. I just want to know if the stock market will go up or down before the Olympics.”

Well, I am a pretty direct man.  I really don’t know.  Predictions about the direction of the stock markets are usually anchored in some notion of value, but in purely speculative markets like those of China, notions of value, even coming from someone as subtle as Warren Buffet, don’t really mean much except over a very long horizon.  In the immediate term, the markets are going to be affected almost wholly by government action, abrupt changes in monetary conditions, and sentiment.  I am not sure I would want to predict any of those things.  Overall, however, I am not very bullish.  I understand that a lot of investors are still desperately hanging onto losing positions begging for a chance to recoup their losses so that they can bail out.  This kind of trading strategy usually limits the upside and drags out the downside.  If forced I’d rather be short than long, but in fact I’d rather be in cash.

On a separate note eagle-eyed Jonathan Lerner sent me the following very interesting article from today’s Bloomberg:

Xia Says Yuan Should Rise Quickly, Then Level, Journal Reports

By Zhang Dingmin

July 16 (Bloomberg) -- Xia Bin, a former official at the People's Bank of China, said the nation's exchange rate policy should be aimed at disrupting expectations of continued currency appreciation, the China Securities Journal reported.

Xia said the government should allow the yuan to rise against the U.S. dollar to “a certain level” in a “relatively short” period of time, then keep it stable and allow for depreciation when the dollar strengthens, the newspaper reported today. Xia now heads the financial institute of the State Council's Development Research Center.

I searched Bloomberg and Xinhua and wasn’t able to find it, so I can’t link it.

Comments (7) for "Waiting for the man"

Hi Michael, I think this is the reference: http://paper.cs.com.cn/html/2008-07/16/content_16450300.htm but not sure since it is all in chinese, but that is where bloomberg is refering to here: http://www.bloomberg.com/apps/news?pid=20601089&sid=aEd7N4TdJyb8&refer=china Anyhow, could you elaborate on the tittle for this post? Who is the man we are waiting for? Best, Eduardo Guelman By Eduardo Guelman - 7/15/2008 10:32 PM

I wonder what that "certain level" might be... By Adam - 7/15/2008 10:52 PM

Twenty-six dollars in my hand... --- Michael, I was wondering how long before I see a nice subtle reference to VU on your blog. Apologies for long delay in responding, I will get in touch on the weekend, promise. Your blog is awesome, Anton By Anton - 7/16/2008 7:32 AM

Michael: A Bloomberg article mentions Song Hongbing's "Currency Wars"... Song Hongbing's ``Currency Wars,'' in third spot, gives readers a historical look at conflicts caused by the value of money. China's yuan, which has gained 21 percent versus the U.S. dollar since a peg was ended in 2005, has been the subject of numerous discussions between the Chinese government and its trade partners. I wonder if you could comment on the content of this book, as a reflection of how Chinese see their currency policy. Thanks By Brian Shriver - 7/16/2008 10:27 AM

Brian, this is a good starter: http://www.chinastakes.com/story.aspx?id=177 "As the US subprime crisis has deepened and, since the beginning of this year, begun to affect China’s economy, the Shanghai stock market has slumped while international markets have seen a loss of $7.5 trillion. Is it any surprise that some people, looking over their shoulders, under their beds and behind their doors, begin to wonder whether this isn’t another American conspiracy. Even the odd senior researcher in one or another of China’s most internationalized banks is beginning to cautiously breathe “Conspiracy Theory” to explain the arcane policies of Wall Street, the Federal Reserve and US Treasury. Is it catching?" "There are those Chinese scholars who have written rebuttals of the book. Fred Hu (Zuliu), general manager of Goldman Sachs in China, issued an article titled An Imaginary Currency War, which brought him huge opprobrium, as his professional position screamed out to many that he was, if not a member of the conspiracy, at least a tool. Others, professors and those familiar with economics and finance, also entered the fray, but each voice was soon engulfed, especially if the writer had had the temerity to have studied abroad." By Gregor Neumann - 7/16/2008 3:00 PM

Eduard, as Anton correctly noted, my title comes from a classic Velvet Underground song, and one of my favorites. In the song, the singer is waiting with money in his hand ($26 dollars) for his drug dealer. I was just making a very stretched comparison to Chinese investors waiting for "the man" (also slang for government officials) to bring us the next dose of drugs to get this market racing again. Brian, I haven't read "Currency Wars" but have read about it and heard it much discussed. It strikes me as part of a collection of crank books -- the US seems to produce a lot of them -- that basically prove that the world is controlled by a secret cabal stetching back at least to the Renaissance (and usually earlier, to the Knights Templar), and currently, or most recently, headed by the Rothschilds. Bizarrely enough Queen Elizabeth and the late Lenin are also often considered part of the cabal's leadership, although we all pretty much know that its the Jews who run it. The only thng interesting about the book, I think, is that it seems to be taken so seriously by the Chinese, including some fairly educated ones. I suspect that this may have to do with the discouragement of critical thinking in the educational system. Adam, I also wonder... By Michael Pettis - 7/16/2008 3:01 PM

If stock market is purely speculative, what about housing market? People in Shenzhen (i guess in other places too) have already purposely played default, as a result of the price fall. If housing price continues falling, there will probably more default cases. That means the properties will sit on the banks' books, i.e. ultimately sit on the sovereign book. You think the Government will let housing market just free fall like it does now? By Megatone - 7/16/2008 3:30 PM