After three good days the market just got slammed again today.The Shanghai A-share index is down 7.2% and B-shares are down 5.06% (once again China Daily called today Black Monday – that’s two in one month).With Asia down in general (the MSCI Asia Pacific Index lost 3.3%), part of China’s decline is explained by global concerns about a US recession, but the fall in Chinese stock markets was seriously exacerbated by a transportation and weather crisis hitting China at the worst possible time.In one city, Guangzhou, a reported 500,000 passengers were stranded by the closing of railway lines.
One joke making the rounds is that the market crashed today because most traders were stuck in airports and couldn’t get out (airports in ten large cities were closed), but perhaps a more serious reason for the fall is that a lot of companies, from airlines to consumer retailers, are going to suffer a steep drop in revenues as holiday plans are cancelled or changed. Nonetheless, indicating how schizophrenic this market can be, China Coal Energy, China’s second biggest cola miner, is bringing a $3.5 billion offering to Shanghai and has already received, according to Bloomberg, more than $400 billion in bids.Since all bids must be fully backed by cash, I wonder if the withdrawal of money from the market by bidders may have contributed in part to the fall in stock market prices. Clearly in spite of market turmoil everyone still believes that betting on IPOs is a sure thing.
Aside from its impact on the stock market the combination of bad weather and power shortages is conspiring to make this holiday season a very unpleasant one for ordinary Chinese.This was exactly what the government was hoping to avoid when it began to implement prices freezes – but in fact the price freezes may have made matters worse by reducing the supply of coal available for power plants and slowing the transfer of pork from the rural areas to the cities.
This is a time of massive traveling in China, when tens of millions of Chinese students and workers shuttle around the country in the hopes of getting home for the holidays.Traveling at this time of year is never easy, but this year it is going to be particularly difficult with a number of train lines closed by unseasonably cold and snowy weather (the worst snowstorms in fifty years).When I am not being a finance professor I own a music club in Beijing, and last night I found out that two of the three kids from the provinces who work for me – one from Sichuan and the other from nearby Dongbei – have been completely unable to get train tickets home and so probably won’t be with their families for the holidays.I told them that I would pay for plane tickets, but so far flights have also been impossible to get. I think an awful lot of people are having the same experience they are.
Meanwhile in the cities prices for food are apparently skyrocketing – up nearly 15% since the end of December. Part of this is temporary – the holiday demands clashing with the weather-related transportation problems – but part may very well reflect the impact of pricing freezes slowing down the transfer of food from the countryside to the cities.This will not make it easier for the government to rein in inflation or to avert inflationary expectations. In fact the unhappiness the transportation crisis will cause will probably put more pressure than ever on the government to focus on short-term measures to ease conditions, even at the expense of necessary changes over the long term.I always expected 2008 anyway to be a particularly difficult year for policymakers, but this weather crisis has made things a little worse.
January CPI numbers come out on February 19.They are not going to be good.
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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