Amy Auster, in an ANZ research report today titled “A sixth Hike is on the Way”, says “Following the rise in August inflation to 6.5%, rumours in the market suggest that September inflation will remain well above 6% and may even reach 7%. Although the pork price, which is the primary diver of inflation, has been falling in recent weeks, the prices of vegetables, poultry and eggs have all been rising in September.”
This is a very different September CPI estimate from the one I discuss in the entry below.Needless to say it is a great deal more alarming.Unfortunately we have to wait another week before we will know the truth, or at least the officially approved version of the truth.
Shanghai-based economist Andy Xie (formerly Morgan Stanley’s chief Asian economist and one of my favorite economists on China), has an interesting Op-Ed piece in today’s FT in which he argues that the Chinese stock market may well be in a bubble but that its bursting will have a minor impact on China’s economy.Among the points he makes is that whereas the value of Chinese stocks and residential property is equal to 3.5 times China’s GDP, in Japan in 1989 and Hong Kong 1987 their combined values peaked at nearly ten times their respective GDPs.This means that in GDP terms a collapse in stock or residential property prices will have a smaller economic impact in China than it might have had elsewhere.
He says for example that a 50% drop in the Chinese stock markets would eliminate as much paper wealth as only a 15% drop in the US stock markets.Xie’s point is that if there is indeed a stock market and real estate bubble, when it bursts it might not have enough of a fundamental impact on the underlying economy to matter. He even implicitly argues that given how expensive housing has become, a drop in real estate prices may be positive because it will reduce, not increase, social tensions: “If the property market drops 30 per cent, most people in China will laugh; only the rich and powerful will grumble.”
I often worry that one of the reasons financial crises take us so often by surprise is because we assume that they are caused by misalignments in the underlying economy, whereas I am convinced they are caused by balance sheet misalignments. For that reason my hackles were a little raised by his comment on the impact of a real estate crash on the banking system.He says: “The banks may suffer bad debts. But the Chinese government has a tendency to pick up the tab after a party and gets another one going right afterwards. It still has the money to do so.”
Maybe. Regular readers know that I am skeptical about how much room the government has to pick up yet another tab as glibly as all that.I think contingent debt levels are much higher than most of us think, and I am pretty certain that if there is a sharp break in the market, people will suddenly want to get a sense of how much debt there really is – and when that happens the lack of transparency will no longer be seen as a virtue.
By the way around a year ago we were saying that stock market capitalization was only 40% of GDP, so a crash would have a minor economic impact. Now we are saying that stock market capitalization is only 115% of GDP (and only one-third of the shares float, as opposed to one-fifth back then), so a crash would still have a minor impact.Still, an awful lot of paper wealth has been created, and this wealth creation has not been spread out evenly over China.Much of it has been concentrated among middle class residents of the largest cities.I would guess that this is not a group whose opinions can be too easily dismissed.
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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January, 2008
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