For the past few weeks Beijing weather has been either hot and drizzly or, even worse, ferociously hot.Today we got a little bit of variation by interspersing ferociously-hot with the occasional tropical downpour. I really hope things get better before the Olympics or else soon enough we are going to have a lot of very bad-tempered out-of-towners running around the city monopolizing all the taxis.
At least the gloomy weather more or less matches the mood of the stock market.The market was up 2.0% yesterday and down 1.2% today to finish the week just over 2.3% down, at 2670. Banks are surprising on the upside with better-than-expected profits, but higher oil prices drove most of the rest of the market down.
Meanwhile the RMB dropped 0.116% today to 6.859. The PBoC, as even little children are now widely aware, is trying to curb speculative inflows by adding dollops of “uncertainty” to the RMB’s upward trajectory. Unfortunately, the fact that everyone knows what the PBoC is doing and why they are doing it isn’t likely to make this measure particularly effective.
We will probably see the currency fairly flat over the next couple of weeks before it shoots up again.Even the daily newspapers are saying this.I have had this discussion many times on this blog, so I don’t want to reignite it, but I am afraid that the net effect of all this “uncertainty” is likely to be nothing more than that people who were very eager to bring money into China as quickly as possible may be, if they really believe that the trajectory is slowing down for a week or two, in a little less of a hurry.Some of the June inflows, in other words, will show up only as July inflows.This isn’t going to make much of a difference.I think the last time they did this was in April, during which month reserve accumulation, at $75 billion, hit at an all-time world record.
One final thing, I was discussing with my students over coffee the effect of the new export-management controls on inflows announced Wednesday night (and discussed in Thursday’s entry). We agreed that if these measures are at all effective in seeking out hidden hot money inflows, the monitoring period would probably add a few weeks to the time between when foreigners pay for an exported good and when the cash is actually disbursed to the Chinese exporter. One of my students, whose uncle is a Southern-province-based exporter, told me that he believed (he wasn’t sure) that typically exporters would need to find financing for this period, and since most of them are excluded from commercial bank financing, they would need to take short-term loans from the informal banking sector.This sounds pretty plausible.
I have heard that short-term loans are going for 5% a month, and my friend Victor Shih tells me that he has seen even higher rates for “prime” borrowers.That means that if we assume that disbursals are two weeks later than payments for export shipments, the cost of production, including financing, for many Chinese exporters will go up by a minimum of 2-3%.Given razor-thin margins in many of the export sectors, I wonder how exporters are going to deal with this.
My guess is that after a few weeks of this we are going to see a lot of pressure by exporters to roll back the measures announced Wednesday, or else many of the provinces, especially Guangdong and nearby provinces, will quietly let the monitoring process slip.
It seems that it would be sensible for the temporary holder of dollars to pay interest (presumably they will be earning some) and guarantee the exchange rate conditional on approval. After all, this is about control rather than raising money.
Yes, RE, but with nominal interest rates in RMB (in the informal banking sector) of more than 5% a month, the interest earned on the deposit is likely to be a fraction of the total financing cost -- probably no more than 0.1-0.2% nominally per month. I can't imagine SAFE would be willing to match the borrowing costs of the exporter.
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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Comments (2) for "Hot weather, cold market"
- 7/3/2008 9:50 PM
January, 2008