An American environmental consultant has just published a study claiming that the main reason the city has been able to meet environmental targets linked to the coming Olympics is because of “irregularities” in the accounting system.He identifies two major irregularities.First, the city dropped a few monitoring stations in high pollution areas and replaced them with monitoring stations in low pollution areas.This caused an immediate improvement in the average numbers, unrelated to any improvement in air quality.Second, the consultant found that after officials set targets for every monitoring station in the city, a statistical improbable number of ratings fell just under the cut-off point between good (“blue-sky”, which in Beijing doesn’t really mean the skies are blue) and bad days.Authorities wanted to see more “blue sky” days, and their underlings duly gave them more, apparently by shaving points. Chinese government officials are justly famous for their ability to deliver what their bosses want.
I have a mild case of asthma, so my lungs are reasonably good at detecting air quality, and during the six years I have lived in Beijing I have been very skeptical about claims about the pace of improvement, but clearly my measuring stick is not very scientific.I don’t know much about environmental monitoring but nonetheless bring up this issue of Olympic environmental standards for a different reason.
I have been thinking a lot about something I read several years ago in a book by Charles Kindleberger and which I discussed in one of my own books (The Volatility Machine).Kindleberger was discussing the 1873 financial crisis, which was a devastating financial crisis that threw the world into depression and which some claim to have been the first truly global financial crisis. As he describes it, the booming markets of the 1860s (powered by high tech railroads and chemicals) turned into a global financial bubble by the early 1870s, fueled in part by the recycling of the massive French reparations to Prussia after the 1870 war.Although the bubble spread to markets around the world – including most of Europe, North and South America, and parts of Asia, its most extreme manifestation among the developed markets may have been in Austria.
Austrian markets were clearly unsettled by the end of 1872 and the beginning of 1873, but the World’s Fair was scheduled to take place in Vienna in May of 1873. This was considered a major (and heavily hyped-up) event that elicited a great deal of excitement and enthusiasm among Austrians. There was a general feeling in Vienna, according to Kindleberger, that something important was happening, and the world, or at least Austria, would somehow be changed by the upcoming World’s Fair.
When the fair opened in May, and not surprisingly the world was no different after its opening than before, within days disappointment and worry set in, and the Austrian markets began to fall, quickly turning into a collapse. The panic spread to Germany and over the next few weeks and months one market after the other around the world fell, culminating in the closing, for the first time in its history, of the New York Stock Exchange that September.
I mention this because here in China I think there is a very unrealistic set of expectations about the importance to China and the world of the upcoming Beijing Olympics. The Olympics are obviously a major sporting event and a sort of “coming out’ party for China, but here in China the event has achieved significance well out of proportion to its reality.For example a lot of my students, and hundreds of thousands more around the country, are “volunteering” for the games, and I think they have very unrealistic (and overly glamorous) expectations of what volunteering will entail. Many of them have planned their futures out until August 8, and haven’t really though about what comes after.The government itself is certain to increase the noise and hoopla as the event draws closer (not that it hasn’t already done so).
I am worried that many Chinese, especially young Chinese, are going to be horribly disappointed when the world doesn’t, somehow, transform itself in a major way the day the Olympics opens.If the ceremonies are seen as less than successful, and one obvious way is if Beijing is criticized for failing to live up to environmental commitments, I think the disappointment will be very deep.I read today that the Swiss dressage team has decided not to compete because the weather in Hong Kong, where those events will be held, may be damaging to the horses, and although I don’t think the world is obsessed by dressage, a few more such cancellations (and the worst will be if there are air-quality-related cancellations) will lead to feelings of deep frustration here.
Already one of the commonplaces in every day conversation is that nothing bad can happen in China before the Olympics, and an awful lot of stock market speculators talk very confidently about closing their positions just before the Olympics.I myself plan to close my B-share position in March to give me plenty of time to beat the expected rush (although I suspect the government is going to do all it can to ease market conditions in expectation of a selling rush). Too much may be riding on these Olympics.
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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January, 2008
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