Chinese Equities, Again
Shanghai takes another big dump
By blackhedd Posted in Economy — Comments (13) / Email this page » / Leave a comment »
I hate to sound like a broken record, but the Shanghai Stock Exchange's benchmark index dumped more than 8% overnight, again. Spillover effects in Europe and Asia were muted. US Treasury securities are up modestly across the yield curve as I write this (shortly before the market open in New York).
I'll accept for the moment the standard explanation that Chinese authorities are trying to prick some speculative excess in one of the world's hottest stock markets. So why are they willing to let tens of millions of Chinese little guys get skinned?
More...
Per my analysis last week, linked above, I'm inclined to accept that the froth in Shanghai is coming from local speculators. That's because the market is relatively small compared to the size of China's economy (perhaps one-fifth of GDP, being very conservative on my renminbi valuation, compared to about two times GDP for the New York Stock Exchange). Also, because turnover on this bourse is astoundingly high. Looks more like a casino than a place to secure secondary equity financing.
You might just accept that there are enough yuan stuffed into mattresses all over China, and that the gambling spirit runs hot enough in the Chinese soul, to account for all of this activity. I might, too. But then you have to ask why Chinese authorities are so sanguine about letting all of these life-savings get flushed away.
Remember that China is playing on a knife edge. For a variety of good and not-so-good reasons, they are pegging their external currency to the US dollar. (Umm, sorry, let's be precise: they're allowing the renminbi to float within a narrow band against a basket of currencies and debt instruments, and keeping a tight limit on its daily changes in value. To you and me, that's a peg.)
Despite the protectionist howls from Democrat politicians and other economic illiterates, the dollar peg isn't going away any time soon. (One of these days, I'll get around to writing a post about why China holds it.)
Now pegging your currency to the dollar is just about as close to being on a gold-standard as it gets these days (unless you're on an oil-standard, like Venezuela). And what happens when you undervalue your currency against an external standard? Well, kindof just what's happening. The rest of the world sells their money to you.
But this leaves China with a problem. Renminbi is not really a convertible currency, except for Chinese nationals. That's why they're stuffed to the gills with US dollars (more than a trillion and counting) that they have nothing good to do with. And that should trigger a single, ugly word in all of your brains:
All together now: inflation.
That's why I think the Chinese are willing to see their stock markets pummel small speculators. China has too much internal liquidity. It's going to start coming down in other ways than lower stock prices, too.
I had occasion to mention in a comment yesterday that Ben Bernanke is perfectly willing and ready to buy in US Treasury debt, should the Chinese start dumping it. That's per an announcement that he made early this year, after China's top central banker said she was ready to start looking for higher returns on her trillion-dollar nest egg.
Does that make you worry about inflation here in the US? It shouldn't. Our money is a lot funnier than a lot of people realize. China may be on a de facto hard-money standard (since they import our monetary policy through their currency peg). But the value of the dollar is almost completely notional these days. Lucky for us, the Federal Reserve are very good at what they do. Let's hope we stay lucky.
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Chinese Equities, Again 13 Comments (0 topical, 13 editorial, 0 hidden) Post a comment »
taxes on trading in China, what if they had increased margin requirements or bumped the short term interest rate a few tics. Do you think it would have a better calming effect? Personally, I don't think the tax increase will have the desired result.
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"Enlightened statesmen will not always be at the helm." -- James Madison
1) A fair amount of their wealth is dollar-denominated.
2) Their currency has value in that it's pegged to the dollar.
3) They make a lot of their money exporting to us.
They have a weapon alright: a suicidal one. If they make one false step against us, they get hurt worse than we do. After all, people aren't going to stop using dollars. People want to sell us oil too much to do that. Their currency though? Ehh, we'll see.
Run like Reagan!
Despite the protectionist howls from Democrat politicians and other economic illiterates, the dollar peg isn't going away any time soon. (One of these days, I'll get around to writing a post about why China holds it.)
You keep defending mercantilism while thinking you are a free trader. Why is that?
...actually reading what I said. Why is that?
Do you think I'm "defending mercantilism" because I'm pointing out that the Democrats are protectionists? Protectionism is economic illiteracy, in the sense that you have to ignore a lot of history and experience to suppose that it will produce outcomes that are economically favorable. (The political reasons why the Democrats are protectionists are a different story, and not part of my topic here.)
Do you think I'm "defending mercantilism" because I'm pointing out that the Chinese are deliberately pursuing a monetary strategy for reasons well known to them, that they aren't likely to abandon? (Would it be defending "Islamic fundamentalism" to point out that it exists?)
And I "keep [sic] defending mercantilism." If you have in mind things I've written in other posts, then produce the quotes and the counterarguments.
"I think I'm a free trader." How do you know what I think I am? Free trade would be a wonderful thing, if we could ever get some. We don't practice it (except insofar as it directly benefits us) and neither does anyone else (except insofar as it directly benefits them). The world is what it is, and I'd rather find ways to adapt to it. You're not going to be getting as much free trade as would be desirable, as long as China's economic policy is centrally-managed, and as long as ours is conditioned by political polls.
And I "keep [sic] defending mercantilism."
sic? Again, you are kidding.
Protectionism is economic illiteracy
And how do you describe the policies which you are defending. Oh, wait, you are not [sic]defending them.
Do you think I'm "defending mercantilism" because I'm pointing out that the Chinese are deliberately pursuing a monetary strategy for reasons well known to them, that they aren't likely to abandon?
No. I think you are [sic]defending mercantilism because you are against taking any action aimed at ending it. Reagan was faced with the same problem with Japan as we are with China. How did he respond to it? Was he economically illiterate?
How do you know what I think I am?
Maybe I'm making a mistake here, but I'm reading what you write and assuming you mean it. So when you say things such as "Protectionism is economic illiteracy, in the sense that you have to ignore a lot of history and experience to suppose that it will produce outcomes that are economically favorable I'm assuming it means you think that free trade is a good idea, in at least some circumstances. But if you want to tell me that I'm misreading you and that you are not a free trader, I welcome the correction.
I'd be defending one policy or another if I came out and told you that it was a good idea, from some specific point of view. Instead, all I'm doing here is describing and interpreting reality as I see it.
I think you're trying to fault me for not saying something you think I should have said, viz. that we should be doing something to end China's policies.
Now this is a post about how China is handling its internal stock markets, with relevance to us in the US because I think what they're doing is conditioned by their foreign-exchange surplus. This is not a post about how we should or can go about ending China's foreign-exchange surplus.
I'm not going to follow you where you want to go and threadjack my own story, Sandor. If you really want to get into a discussion of what we can do to change how China manages their foreign trade, write a diary about it. You're going to find out that China is an awfully big country, with an awfully big footprint in today's global markets. You never really spell out what you don't like about what China is doing. (Neither did I, but again, that would be a threadjack.) We need to change our behavior and become more competitive in some ways that I've never heard you discuss if we're going to meet the real challenge from China. And that has nothing to do with whether or not we buy their cheap manufactured goods.
Reagan and Japan: as I mentioned in response to another comment, the devaluation of the dollar vis-a-vis the yen in the mid-Eighties was accomplished by means of a policy tool that no longer exists. But even given that, Reagan's people convinced the Japanese to go along with that as part of a comprehensive agreement involving all the G7 nations. I don't think Hank Paulson is going to have any luck doing the same thing with Wu Yi, do you?
I also don't think Secretary Rohatyn will have any more luck than Paulson once Hillary is President. I'm looking forward to a diary from you on exactly what we should be doing and how.
...Japan c.1987 times two or three. They're sitting on an enormous liquidity problem that is going to come back and bite them hard -- and when they're bitten hard, we're all going to feel it.
I believe it was Bear Stearns that put out a report a year or so ago that Chinese banks were sitting on more than a trillion dollars of non-performing loans.
I'm not sure how that powder-keg-waiting-to-blow will manifest itself. But I'm certain it won't be pretty. When you add that to the list of problems you've highlighted here, it's hard to come to any other conclusion than that they're in store for a long period of problems.
The good news is that Japan seems mostly to have recovered -- albeit after more than a decade in the monetary doldrums. And they're still in the fiscal doldrums.
I'm not generally a worrywart about such things as Chinese ownership of US public debt. But it's not hard to imagine the pressures inflicted here when/if the overleveraged Chinese chicken comes home to roost.
How very interesting and perceptive this comment is. I'd respond to you that China observed very carefully what happened to Japan and they'll be d*mned if they let the same thing happen to them. Remember the Plaza Accord? And all the news stories circa 1985 about how overvalued the dollar was? Well, by 1987, the Japanese had allowed the yen to appreciate against the dollar by about 50%, compared to its 1985 level.
Now this was achieved through a method (central-bank intervention) that is no longer available today, not since George Soros told the Bank of England that his balls are bigger than theirs. (They called him on it, and he proved it. And the Democrat Party has been spending his money every since.)
But still the result was disastrous for Japan. They're coming out of it now, to some degree, but look at their domestic interest rates, still microscopically low. This is not an economy that is generating any final demand. And fifteen years is a very long for an economy to spend on the floor.
The Chinese are too smart to let that happen to them. (Which is why all the yammering about trade protectionism from Chuck Schumer and Hillary Clinton only makes them... angry.) But credit quality still has been deteriorating in China. As long as export demand from the US remains strong (which I predict will be the case), China will be insulated from any internal recessionary pressure.
A communist regime commanding billions of people and you wonder why they are willing to let mere millions of people get skinned?
1) Millions/billions = too small a percentage to worry about, unless its democracy protesters on the main square
2) The failure of the stock market would prove the paternalsim of Chinese communism is superior to free market capitalism.
3) They force their married couples to have abortions if they conceive more than 1 child and you think a little stock market larceny is going to cause them problems?
Please, they couldn't care less.
...but I wanted to be clear on some of the numbers, and explain some of my analysis. China has about 1.3 billion inhabitants. (To me "billions" would imply two billion or more, but I'll grant your point, it's a lot of people.)
Recent news stories indicate that about 100 million accounts are currently open, that can trade stocks in Shanghai and Hong Kong. Many (perhaps most, by which I mean more than half) of these were opened "recently," by which I mean in the 18 months since Shanghai's stock index began its current rally.
If this is all true, then it seems like a lot of people are gambling with their savings. Since China's rural populations (perhaps 800 million people) haven't so much as a pot to [urinate] in for the most part, I'm surmising that most of the new "little guys" are among China's urban populations, the same people who, considered on their own, are experiencing rapidly-growing living standards.
I submit to you that the Chinese regime's continued hold on power depends on their ability to continue to deliver increased living standards to the city dwellers, while keeping the countryside suppressed enough to avoid a replay of 1946-49.
In short, I think they care very much what happens to the savings of their people, but because of their liquidity situation, they aren't worried that pricking a market bubble will result in widespread pain.
Counterargument?
When it pops it may be great propaganda of why capitalism doesnt work. Never underestimate the ability for morons to spin fact into fiction.
Just because you have the right, doesn't mean you should.
Certainly our relationship to China, our trade deficit, and their ability to use a trillion dollars of our bank notes as a weapon is important.
But, you fail to mention that the current fall in Chinese share prices was precipitated by an increase (last week) in taxes the Chinese government charges on share trades. You mention the "froth" in the Shanghai market and the high turnover rate. This tax increase would seem to be an effort to tamp down the speculation and high turnover. As such, you wouldn't expect it to have much effect outside of the Chinese markets.