My Blog

December 8, 2007

The mainland stock markets are down 19% from their highs in October, although Shanghai and Shenzhen both traded up this week, and there is a growing concern it seems, at least judging by the amount of ink spilled, that future IPO first-day-of-trading performances are less and less likely to achieve the eye-popping results that they have in the past.  If this is the case, we should see a lot less money tied up during the “frozen” period before and just after the launch of IPOs.  I would guess that mainland retail investors would be less interested in tying up so much money before an IPO if the expected return on the very small portion of their bids that actually receives allocations drops significantly.

This should be good news for small banks, who have been hurt pretty badly by the draining of liquidity caused by these IPOs (see my November 8 entry, “Small banks squeezed by IPOs”).  It would at first also seem to be good news for the PBoC, who has an unenviable task over the next three or four months of draining liquidity from the system without letting interest rates rise too much.

In the short-term, however, I wonder if smaller oversubscriptions might increase underlying liquidity by reducing the amount of money tied up in IPOs (which has been significant enough to drive short-term interest rates up in some cases by over 100 basis points).  I am already expecting the $80-100 billion a month on average that the PBoC will need to drain from the system over the next few months, most of which comes from maturing central bank bills, might help propel another leg of the mainland bull market in stocks.  It is interesting that before last week’s Central Economic Conference there was a consensus that one of the proclaimed macroeconomic objectives for 2008 was to help “prevent” asset bubbles, but this was not discussed in the policy statement largely, so I am told, because policy-makers were concerned about an adverse impact on the stock market.  Instead we only had two: “prevents”, prevent economic overheating and prevent spreading inflation.

It is not going to be easy to manage the reflation or deflation of the stock market bubble, especially since there is still a fight going on as to whether or not CPI inflation will persist.  Anxiety levels have clearly risen, but I understand that the NDRC is arguing that CPI inflation is limited to food and will subside quickly in 2008.  The institutional “reason” for their beliefs, I guess, is that they are pushing for reform on the pricing of energy and utilities, and this would be all the more difficult to achieve if inflation was spreading throughout the economy.