The government has spoken, I guess. At any rate the stock market certainly thinks it has. As a side project I run a small investment club, with money supplied by me and some friends, that is invested in a diversified portfolio of Shanghai-Stock-Exchange-listed B-shares (which foreigners are permitted to own, unlike shares in the much larger A-share market), so I can’t say I was disappointed when I clicked onto the SSE website and found that the B-share index was up 7.94% today (A-shares are up 8.13%). Although I am a little surprised at the extent of my gains, I am not at all surprised that my shares, and the market more generally, is up significantly today.
In fact I knew all weekend that my shares would be up today. How did I know?Easy.Everybody knew the market would be up today because the government very cleared signaled over the weekend that it wanted the market to go up. It was as simple as that.An article in today’s China Daily explains: “Monday's rally came after the China Securities Regulatory Commission (CSRC) gave the green light to CCB Principal Asset Management Co. and China Southern Fund Management Co to launch two funds expected to raise 14 billion yuan for equity investment.”
About four months ago, as a sign that it was very unhappy with the excess rise in the stock market and wanted it to come down, the government embarked on a series of measures to bring prices down.One of these measures was to prevent the launch of new mutual funds – always an important sign here of the government’s intentions.The market duly collapsed. At its peak in mid-October the Shanghai CSI hit 5885, before dropping to 4318 on Friday (a decline of nearly 27%).But now, by approving the application of two of these funds, the government made it clear that it believed the decline in the markets of the last three months has been excessive and may begin to have adverse effects on public sentiment. It was time for the market to go up.
While I yield to no one in the gratitude I feel towards anyone who can increase my wealth by several tens of thousands of dollars in a single day, I have to say that this is not as good for the development of stock markets in China.This kind of behavior will only delay by several more years the time when Chinese markets begin to fulfill their role as an efficient allocator of capital, taking money away from the least efficient and passing it on to those with the best growth prospects.I wrote about why in a January 2 posting (“The government condemns Chinese financial markets to speculation”).
A purely speculative market does not allocate capital efficiently based on reasonable estimates of future earnings prospects. Speculative investors simply try to exploit short-term price changes, usually based on changes in short-term demand or supply factors.In China the only important piece of information is about short-term changes in government and regulatory actions caused by changes in the government’s current intentions (and these change dramatically month-by-month and even day-by-day sometimes).Bloomberg quotes a grateful fund manager today as saying: “It is encouraging to investors that the government has done something to intervene in the market decline. We are probably already at a level where the regulators don't want to see a further decline.” Recent activity simply reinforces the message that in the Chinese markets the only thing that matters is the government’s intention, and the only people allowed to play are the speculators.
The trouble is that you have a Catch-22. The markets are prone to the perception of government intervention because they are small, and they are small because they are prone to perception of government intervention.
I say the perception of government intervention, because in this case, I really don't think that the CSRC intended to move the markets. The "green light" was something that had been expected for months. However the markets are so small, that everything that the government does is taken as a signal that moves the market.
In the US, the government couldn't intervene heavily in the markets even if it wanted to. It can push the direction of the market with interest rate cuts, but even these have limited impact because the markets are large.
I do think that index ETF's will help the situation since by going long on on a company and short an ETF, you can invest in a company and filter out overall market moves if that is what you want to do.
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 "In China even Warren Buffet ...
- 2/3/2008 11:09 PM
December, 2007