Friday, April 20, 2007

Grasping At Straws
The New Media / China

As I have mentioned before, the excessive focus and deluge of coverage by the media on all things, and in our case the business world, have required us to have a more critical mindset and also layers of filters in place when coming across so called "news / commentary / analysis". Take yesterday's drop around the globe. News editors around the world would want an article written immediately; analysts will be pestered by journalists and clients for reasons for the declines; dealers will try to make sense of the whys and hows; and the general public will just pick up whatever that is being broadcasted as coffee shop talk. Note the vicious cycle reconfirming and validating the purported news / reasons. What I am trying to get at is that sometimes why the market moves like that is "nothing significant". Media and analysts claim that a sharp pickup in the pace of China's economic growth underscores the challenges Beijing faces in trying to control and rein in the country's vast, far-flung economy.

China's statistics bureau announced yesterday that gross domestic product expanded 11.1% in the first quarter from a year ago, an acceleration from the 10.4% year-over-year growth recorded for the previous quarter. All major indicators, including retail sales, factory output, capital spending and inflation, accelerated during the period, raising new worries about excesses in an economy that has grown by more than 10% a year for four straight years. Concern among Chinese investors that the government would respond by seeking to slow growth by raising interest rates sent the Shanghai Composite Index down 4.5%, even before the economic data was released, and contributed to weakness in markets across Asia.

We have to learn to get more comfortable with the volatile China and India markets. I mean, look at the silly 9% correction in early March which caused a huge round of selloff ... and what was the reason, rumours of a capital gains tax on stocks!!?? Just a rumour can send the charged up market down 9%, so I guess a 4.5% fall really indicates very minute concerns.

Just like before, yesterday's correction was mainly due to a natural cycle of the need to correct, not because of any earth-shattering change in fundamentals. Its like when you poop, and journalists surround your toilet banging for reasons why you have to poop and why now! When you got to go, you got to go, its a normal cycle! Global markets have been chugging along to retest their all time highs - its only natural to have a bit of stop-start as markets try to get past those psychological levels. So, sometimes, no need to go searching for reasons too hard.

That being the case, China has problems which they are trying very hard to control. Please re-read my previous two postings on China Calling and China Calling Again (20th & 21st March 2007 postings) to get my views on China. I wouldn't want to buy trading China markets cause I think the top officials will want to slow the growth engine somewhat by hook or crook. The predicted call for adjustments to interest rates or the currency will not yield the same textbook effect on China. There is too huge a gap between deposit rates and the lending rates: hence increasing lending rates aggressively will not see a corresponding rise in deposit rates. Property players are still willing to take up at higher lending rates owing to better capital gains. Officials have to restructure the financial system to narrow the gap for deposit rates for rate increases to have a more desired effect. As for yuan, they may very well speed up the appreciation but does not go very far to address the trade surplus. The yuan would still have a long way to go before it becomes a deterrent to attracting FDIs into the country. Mind you, more than 60%-70% of all exports from China are from foreign MNCs operating jvs or companies in China: thus they are just re-exporting back. The trade surplus looks bad as a PR exercise but officials know the culprits are the foreign companies themselves. Of course, it will impact FDI if we see the yuan gaining 10% a year, but that will not happen. There isn't sufficient political will or leadership to commit to that. The crux is the top officials know the Chinese financial system is still weak and is ladened with loads of state loans and state companies' excesses. As long as foreign banks are willing to come in and help repair the damage, improve reporting standards and financial management - top officials want to buy enough time for the financial system to get stronger before allowing the yuan to really gain significant strength. Thus their hands are tied as neither the interest rates or currency strategies will work for them. I expect more fiscal measure, even hard fiscal measures which will really let the steam out of the property and stock markets. Believe you me, I think the government is more concerned over their property side than the stock markets side of things. We can safe expect some significant tightening via fiscal measures in China soon. It could be in the form of: 50% capital gains tax for properties disposed within a year; or allow new loans of only up to 60% of property value ... you get the drift.

At the end of the day, the government is unlikely to try anything drastic as they need to keep a happy face for the world to see for the Olympics. Nothing more important than "paper face".


rask3 said...


I'm no expert in these things, but your analysis didn't touch on the problem of the mountain of reserves that the Central Bank of China is sitting on. And they are holding too much USA govt debts that may have to be dumped if the USA doesn't stop over spending and over importing and so on.

The huge trade imbalances could turn out to be a ticking bomb and there are fears how the implosion of the bomb will play out in the financial markets.

I feel China to should not revalue the yuan too much as the US wants it to do. Rather they should use their trillions to buy prime assets around the world, including equities, real estate, oil fields and what have you. Then they would be on their way to getting their stripes as the next super power of the world. It's time Asians got back the glory so long enjoyed the Westerners who once sold opium to China and destroyed countless lives.

Phew. I had to show my ugly side.


Salvatore_Dali said...

I did touch on the mountain of reserves before, pls read previous posting in China Calling and China Calling Again... the govt has started with Lianhui, a Temasek-clone to invest in overseas assets. Its a way to reduce dollar holdings without spitting in the face of the US. China knows its silly to keep hoarding dollars and allowing the yuan to appreciate at the same time - its like robbing from yourself.

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