The stock markets here are being buffeted around by rumors of futures trading on local stock indices. Yesterday Fan Fuchun, Vice President of the CSRC, gave a speech at a forum in Shanghai in which he seemed to imply that everything was ready for a launch of a futures market on the main Shanghai index. That set off rumors about an imminent approval.
Although previously there were fears that index futures would cause the market to crash, the rumors actually drove the market up 2.5% yesterday. Today, it seems that the rumors were quashed. According to an email from my student Shang Ning:
The speech by Fan Fuchun has been posted today on the official website.However some words have been changed. “The preparation has been completed” has been changed to “The preparation has made big progress.”
That is, clearly, a significant change in meaning. The market traded up early in the day after opening 0.7% down, mainly because of lower oil prices and strong markets elsewhere – the Chinese oil “brothers” performed very well – to a high of 3481 (up 0.6% from yesterday’s close), before dropping 2.3% from its high to close at 3401, down 1.66% from yesterday’s close.
The Economist has an interesting story this week in which it warns that “emerging economies risk repeating the same mistakes that the developed world made in the inflationary 1970s.” The main message is that stagflation is becoming a real threat to a number of emerging economies, including China, for reasons that are worryingly reminiscent of the US in the 1970s.Among other things they say:
Many policymakers in emerging economies argue that serious monetary tightening is not warranted: higher inflation, they say, is due solely to spikes in food and energy prices, caused by temporary supply shocks and speculation. Higher interest rates cannot call forth more pigs or grain. They expect inflation to ease later this year as higher prices prompt an increase in supply (food prices have started to edge down over the past month) and as sharp rises in commodity prices drop out of year-on-year comparisons.
Yes, food inflation is likely to slow later this year; but that does not mean rising headline inflation can be ignored. The synchronised jump in global food prices suggests that there is more to the story than disruptions to supply. Prices are also rising partly because loose monetary conditions in emerging economies have boosted domestic demand.
They go on to make an interesting point:
According to conventional wisdom, the monetary-policy mistakes that caused the Great Inflation are much less likely today because central banks are independent of politicians. But unlike the Federal Reserve and the European Central Bank (ECB), many central banks in emerging economies (notably China, India and Russia) are not fully independent. In another echo of the 1970s, they often face intense political pressure to hold rates low to boost growth and jobs.
It is easy to see a possible example of this in the debate in China between the monetary alarmists, who are worried about excessive expansion in the money supply and about rising inflation, and the pro-growth camp, who dismiss the recent high inflation numbers as arising from temporary and reversible shocks.They may be right (although I side with the monetary alarmists here) but unfortunately, as the US learned in the 1979s, by the time there is incontrovertible proof that inflation ids a problem it will be very difficult to drive it outrt of the economy without a sharp slowdown.
Meanwhile the South China Morning Post says in an article today by Adam Chen that “Currency regulators on the mainland have increased surveillance of the flow of so-called hot money into the country, asking banks in Shenzhen to report deposits of more than 50,000 yuan (HK$56,250) by non-mainland residents.” According to the article SAFE was behind the move to monitor and manage destabilizing money inflows.Shenzhen has become one of the biggest conduits for money inflows, which is not surprising given the amount of business-related traveling between Hong Kong and Shenzhen, but I would guess that it is going to be very hard to reduce this. There are too many ways money can enter the system.
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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