In yesterday’s China Daily there was an article titled “Pledge not to stop rice exports lauded.”The article states that COFCO, China’s leading grain, food oil and food import and export group – which apparently exports rice equal to 1% of the volume of internationally trade rice – will not cut rice exports.Given China’s own food supply problems, this is a commendable move if true because, as far as I understand, the supply of rice is close to crisis proportions in many Asian countries. And of course it doesn’t make China’s own food supply problems any easier, although my back-of-the-envelope calculation is that this probably affects less than one-half of one percent of total Chinese rice production.I suspect that a number of major governments along with the appropriate agencies – perhaps the World Bank and the Asian development Bank – are going to need to organize some coordinated response to the rice problems.Perhaps China can take the lead here.
On a separate note, there are very persistent rumors, and some supposed quotes from unnamed sources at the CSRC, running around about the CSRC permitting margin purchases of shares.In the past Chinese investors were required to put up the full amount of their share purchase and were not allowed to use leverage for stock investment purposes (although there have apparently been many ways to get around this regulation).If true, and they do begin to allow buying on margin, I suppose we can add this measure to the number of administrative measures in the past few months aimed at supporting the market – increasing QFII quotas, permitting the launch of new funds (after they were stopped last year in the heat of the bull market), constraining the sale of strategic share holdings and new share sales, and most recently reducing the stamp tax.
If they do permit margin purchases this would certainly add buying power immediately, and so might result in a surge of buying if there is real desire on the part of investors to increase their exposure.Nonetheless I hope they don’t do it.I think in the past they have been wise to limit leverage and derivatives in the local markets because these can significantly increase the power of speculative traders, and that automatically adds volatility to the market – something of which we don’t really need more.The argument that these types of instruments can also be used for hedging purposes or for more efficient capital allocation decisions does not hold in China, in my opinion, because the structure of the market precludes the existence of the types of investors who would use these instruments for non-speculative purpose.I explain why I think this in my entry for January 2.
The CSRC issued regulations permitting margin buying and selling on a limited and experimental basis about a year ago. I remember reading the regulations on the CSRC website, and I'm trying to find a copy of them.
Twofish, I think you are referring to a rule effective August 2006 that allowed margin trading under pretty restrictive rules. Only selected firms were allowed to offer margin and there was a quota for the total amount offered (I want to say the RMB equivalent of $1-2 billion, but don't quote me on it). I think it was also limited to very large trades, involving tens of millions of dollars per trade. I have no idea how this developed but it was a very small program and it excluded the vast majority of investors.
By Michael Pettis - 4/26/2008 3:52 PM
The rice exports is not a commercial issue but actually a political one in china, and some rice has been exported to africa for political consideration. And also, I do not think the authority will allow the margin for all trades, expecially individual traders, who will be even exposed to more risks by using leverage. And this will surely demolish the "harmony of the society", which is the pivot of all policies for the government.
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 (3) for "Rice and margin"
- 4/26/2008 3:35 AM
December, 2007