My Blog

April 2, 2008

Once again I have had trouble posting onto my blog, so I was only able to post this morning the following entry from yesterday.

After an awful first quarter for Chinese stock markets (down 34%), there seems to be a rising crescendo for stock market support measures by the government.  Today the China Securities Journal quoted a report by the State Information Center, an NDRC-affiliated think tank, calling on the government to take concrete steps to support local stock markets.  Since the stock market plunge was “not in line with the country’s economic fundamentals,” argued the authors, it needed to be stopped.  According to the report: “Historically speaking, a country with a fast-growing economy and an appreciating currency should see its stock market develop rapidly. China is exactly at this period of its development.”

History is always a sinuous thing in modern China, one whose main purpose is to support current policy goals, so it probably doesn’t do much good to point out that there are plenty of cases in history of slumping stock markets in rapidly growing economies – not especially surprising when you consider that the stock market is supposed to be a gauge of future expectations, not a report card for past GDP growth.  What is more interesting to me is that a major think tank supported by the NDRC, the country’s top economic planner, is calling very explicitly for government intervention to support the market. “It is a common practice for governments to directly and resolutely intervene in financial markets in instances of major volatility, even in Western countries,” the report claimed, more or less clinching the argument.

Perhaps in line with the SIC sentiments, yesterday an official at the China Securities Regulatory Commission denied a rumor that there were net redemptions at mutual funds of about RMB 100 billion during the first quarter of the year.  On the contrary, he claimed, total redemptions were about RMB 17 billion and total new subscriptions nearly twice that amount, according to today’s China Daily.  The rumor, which seemed to have come from a 21st Century Business Herald article, “goes against the facts and is misleading to investors,” according to the official.

The good news doesn’t end there.  Today’s Xinhua reports that “Investors remain optimistic about stocks.”  According to a recent survey released by the CSRC, more than 60% of Chinese investors expect stock prices to rise.  The Xinhua report goes into a great deal of detail about the composition of the retail investor base (or at least that part who answered the survey) but doesn’t say when the survey was taken – although my best guess from reading between the lines is that it took place in January, before the big crunch, so I wonder how many people now still believe stock prices will rise. 

My own interpretation of all these claims and clarifications is that the government is very worried about the stock market collapse and is doing everything it can to pump up excitement about the market.  If this doesn’t work I suspect that they will take more concrete steps.  By the way the market was up a little today – about 0.6%.

Of course if there is a turnaround in the stock market, it may solve one pressing concern but it may also worsen another – and this is one of main difficulties in which China finds itself: each of its problems is interlocked with other problems in such a complex way that policy choices are sharply constrained.  Specifically, if there is a sharp stock market rally (and given monetary conditions, a slow, gradual rise in stock market indices has a very low probability of happening – it is either boom or bust), it may create yet another reason for speculative inflows.  In the past it seemed that speculative inflows were correlated with the thrilling performance of the stock market.  When that game was over, inflows seemed to have shifted to bank deposits to take advantage of the more-rapidly rising RMB. A renewal of the stock market bull will only make monetary policy harder than ever to manage since it will probably encourage hot money inflows even more.  Damned if you don’t and damned if you don’t.

Meanwhile there continues to be bad news on the food-price front.  Today’s China Daily reports that northern and northeastern China is suffering from the worst drought in decades.  This will have a terrible effect on agricultural production, especially in the province of Heilongjiang, a province that is, according to China Daily, the country’s largest supplier of commodity grains, including corn, soybean, rice and wheat.  Up to 51% of the province’s total planted area could face severe drought during the spring plowing season.  This means that even if the inflation problem in China really is pork, and not money, as Ken Rogoff memorably put it, the pork problem may very well persist.

Nine more days to the March CPI release.  I haven’t been hearing much in the way of price rumors, but I expect month-on-month inflation to be down a little and year-on-year inflation to be up over 7%.

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