The Shanghai and Shenzhen stock markets are still hogging the spotlight. Although down 18.0% from its recent peak exactly one month ago, the past three days have been good for Chinese stock market investors. After rising 0.60% on Tuesday and 1.17% on Wednesday, the SSE composite was up a very smart 4.79% today.
So what happened? Better-than-expected earnings from Chinese corporations? A surge in US household income and a decline in US unemployment boosting the prospects for China’s tradable goods sector? A huge new loan number for the month of August?
Actually, none of the above. In fact the US numbers look especially bleak for China. In spite of some seemingly good news on the macroeconomic side, unemployment in the US is still rising, and even that masks the depth of the problem. Many Americans who have lost jobs have since then found new jobs, but at lower pay, so that although they don’t show up adversely in the unemployment data, they nonetheless represent lower income to workers as certainly as rising unemployment does, and this will have an impact on future private consumption.
Societe Generale’s ever bearish Albert Edwards had an excellent piece on the subject on August 6, in which he argues that:
US nominal household incomes are now contracting at an unprecedented rate. The largest component of household income is wages and salaries which had been declining some 1% yoy. But after revisions the statisticians now admit to an unprecedented 4.8% decline! Total pre-tax household income is now recorded as falling 3.4% yoy in June.
If US household income is declining so sharply, we can’t really expect a sharp pick-up in imports, even ignoring the fact that households are also in the process of deleveraging, and so cutting back even more sharply on consumption that their incomes might indicate. But in spite of still-bad news in both the external or internal environments, the markets are nonetheless in a much better mood than they were just a few days ago. Why? The People’s Daily explains:
Chinese equities climbed Wednesday after the country’s securities regulator said it would take measures to promote the steady and healthy development of the market.
Or, if you prefer Bloomberg’s slightly more forthright explanation:
China’s stocks rose the most in two weeks on speculation regulators will adopt measures to boost the nation’s equities following declines in the past month.
The main cause of the surge seems to be a statement made Liu Xinhua, vice chairman of the China Securities Regulatory Commission, at a forum in Beijing yesterday which was proclaimed on the front pages today of China’s two biggest financial newspapers, the China Securities Journal and the Shanghai Securities News. Mr. Liu promised that regulators will promote a “stable and healthy” market. This has been interpreted to mean that the authorities will not let the market continue falling, and will introduce measures to force it up.
Bloomberg continues, with something that is widely acknowledged but wasn’t covered in the People’s Daily article:
The government may take measures to stabilize the market before the 60th anniversary of the founding of the People’s Republic of China on Oct. 1, the start of a weeklong holiday. “They want everything to be stable and in harmony,” said Francis Lun, general manager of Fulbright Securities Ltd., in an interview with Bloomberg Television today. “They will approve more stock market funds and allow them to buy into the market.”
There is a general sense that no one wants the markets to misbehave before the all-important October 1 celebration of the sixtieth anniversary of the birth of the People’s Republic. Needless to say this begs the question about when exactly should you, as an investor, get out of the market? The day before? But if everyone knows that, then shouldn’t you get out two days before, or maybe three, since everyone has presumably figured that one out too?
In 2006, 2007 and 2008 I wrote often about the dangers of this sort of market signaling. There may be perfectly good reasons to want to manipulate the markets with non-fundamental information, but every time this happens it further undermines the development of a healthy capital market that allocates capital based on economic prospects by undermining the value of fundamental information and reinforcing the value of speculation on government intentions. Still, on such an important anniversary I suppose it was totally unrealistic to think that the authorities would let angry investors spoil the party.
The stock markets may have also taken some heart from a good, although sobering, speech from Premier Wen when he met with World Bank President Robert Zoellick earlier this week. According to an article in Xinhua, Premier Wen said that
China‘s government would continue to pursue proactive fiscal and moderately easy monetary policies. ”We will not change the orientation of our policy,” Wen said.
Wen said China would fully implement and continue to enhance and perfect policy in response to the international financial crisis to achieve the goals of economic and social development.
This was taken by everyone as a pretty clear conformation of what I discussed in last week’s entry – that although there were increasing worries about the cost of the fiscal stimulus package and the lack of an “exit strategy,” in the end the State Council and the policy leadership were still more worried about a sharp slowdown in growth than about the risks of excessive investment:
I wonder, and I know I am not the only one wondering, what Zhongnanhai is thinking as it sees the impact of these rumors of a contraction in the furious rate of credit expansion. For one thing it seems that there are only two positions on the switch – “surge” and “swoon” – and I suspect that very quickly we will see the switch turned back to “surge”. Although there seems to have been a little upward blip in US import numbers, I think this represents more of a temporary bounce from a steep earlier decline, and that the external environment continues to be very poor.
My guess is that if the local stock markets do not soon recover their bounce (and they won’t without government help) and, even worse, if we start to see the awful sentiment seep into the real estate sector, Beijing will once again push forcefully for credit and fiscal expansion. In my opinion there is simply no way that domestic consumption – unless it is primed with government giveaways – can make up the slack quickly enough.
A recent report by CLSA also says that the PBOC apparently believes that one of the causes of the lost decades of Japanese growth was premature tightening in the late 1990s which “killed the momentum of economic recovery when it was only in the budding state,” and so the PBoC has cautioned against doing the same in China. It is better to be too loose than too tight.
Although I think perhaps the right comparison is not with Japan in the later 1990s but rather with Japan in the late 1980s, this “lesson” was reinforced by another, according to the same report:
Beijing seems to agree with Ben Bernanke that “The correct interpretation of the 1920s, then, is not the popular one–that the stock market got overvalued, crashed, and caused a Great Depression. The true story is that monetary policy tried overzealously to stop the rise in stock prices. But the main effect of the tight monetary policy, as Benjamin Strong had predicted, was to slow the economy – both domestically and, through the workings of the gold standard, abroad. The slowing economy, together with rising interest rates, was in turn a major factor in precipitating the stock market crash.”
Although I think I agree with Bernanke, again, I am not sure this is the right lesson for China. The problem is that loose monetary policy is exacerbating the imbalance that China needs to work though, since most of the expansion is being directed at investment in expanding current and future capacity, but this comes at the cost – which was not the case in the US – of constraining the future growth in domestic consumption. Without rapid future consumption growth, as I have argued many times, I just don’t see how China can support rapid GDP growth once the huge fiscal push becomes unsustainable and runs out of steam.
Clearly this concern is still part of the internal debate. Chi Fulin, president of the China (Hainan) Reform and Development Research Institute and a member of the Chinese People’s Political Consultative Conference had an interview which was reported in an article in today’s People’s Daily. In his comments he makes many of the same points I have been worrying about, albeit perhaps in a more politically acceptable way:
Chinese leaders should rethink the country’s reform package amid changing global and domestic situations and take “quicker and radical” steps to move toward a market-oriented economy by 2020, said a senior political advisor. The reform measures should speed up urbanization, break down industry monopolies by the State, deregulate energy, offer equal social welfare for both rural residents and urbanities, and improve the government’s efficiency.
“Our top leaders should take quicker and radical measures in these endeavors within the coming two or three years. By doing so, China can do a better job in post-crisis management as well,” Chi Fulin, president of the China (Hainan) Reform and Development Research Institute told China Daily in an exclusive interview. “Looking at the goal of realizing a market economy by 2020, we cannot afford to lose the time window of the next two or three years in the reform.”
Several times in the interview Chi mentions the “urgency” of the need for reform, which included removing many of the production subsidies, price deregulation of resource products, and reducing the State’s industry monopoly. My interpretation of his comments is that he is, as politely as possible, warning that the government still hasn’t taken the necessary steps to restructure the economy. He concludes “Whether consumption can become a leading engine of China’s economy depends on how successful the reform is.”
——-
On a very, very different subject, I hear that there were more demonstrations and unrest in Urumqi today. My understanding is that the large group involved met in a square over claims that people in Urumqi have been attacking innocent people with syringes. There have already been demands for retribution. Here is what China Daily says:
URUMQI: Police have seized 15 people for stabbing members of the public with hypodermic syringe needles in northwest China’s Xinjiang Uygur Autonomous Region, a senior local official said Wednesday. Of the 15, four were officially arrested and prosecuted, said Zhu Hailun, head of the political and legal affairs commission of the Communist Party of China (CPC) committee in Xinjiang.
This is way outside my area of expertise, but ever since the early days of AIDS there have been persistent reports around the world of AIDS victims randomly attacking people with syringes and injecting them with infected blood. I have no idea of what has happened in Urumqi, but I wonder if this talk about syringe-wielders isn’t underpinned by these kinds of rumors. I am not a weapons expert, but it seems to me that attacking someone with a syringe would otherwise be pretty inefficient. Even an ordinary beer bottle has to be a better weapon than a syringe.
For what it’s worth, it seems that as widespread as these AIDS-infected-syringe claims have been in the past, and as certain as many people are that they have occurred, there has apparently never been any credible confirmation of such an attack — no eyewitnesses, no police records, no medical records. This is apparently one of those urban myths that we seize upon for reasons that may have more to do with our own fears than with any reality. I’d be curious to see whether or not these attacks in Urumqi are confirmed and, if so, to get a better sense of why anyone would use such a weird weapon.
Michael,
It is a false dichotomy to say the Depression was either caused by the market crash, or by Fed policy.
Irving Fisher posited it was unsustainable debt levels and the subsequent debt deleveraging. The market played a role in that the rise was highly leveraged, their debt fueled stock buying trusts the equivalent of our CDOs. And the Fed policy then was boneheaded, but it isn’t clear how much that mattered.
The Fed right now has taken the polar opposite stance than it had 1930. How does that help the homeowner who has a $400,000 mortgage on a $250,000 house? Or the owners of the large buildings in NY, that had 105% LTV mortgages and are now marked down 40-50%? The problem is insolvency.
Where do we most clearly see the effects of the easy money? Commodity price rises, which is essentially a tax on the 95% of Americans who aren’t farmers or in the energy business. And, of course, bank profits.
Fisher’s theory meshes perfectly with what occurred here over the last 30 years–a continually rise in debt levels until it became unsustainable. During the rise, we experienced a “great moderation” of economic swings. Was this because the Fed was so adroit, or because ever increasing debt lessened the impact of each downturn, and grease the skids for each expansion?
Fisher’s theory meshed well with what happened in the 1930s, but also what is happening now. But most importantly, it offers an explanation of how we got here. How does Bernanke’s mainstream view explain it? Bad luck?
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Investment does not necessarily lead to increased capacity. It can simply increase productivity. For example if China builds railways, roads etc this will make the economy more productive by huge savings in time on transport, but it does not add to capacity. The same would be the case if older plant were replaced with newer.
Given the emphasis on infrastructure in the investment programme it is therefore unlikely that: ‘most of the expansion is being directed at investment in expanding current and future capacity.’ It is much more likely that ‘most of the expansion is being directed at investment in raising current and future productivity levels’. As studies show that increases in total factor productivity are high in China, much higher than in the US for example,such investment will is more likely to sustain a rapid increase in productivity.
A criticism that a large scale investment programme will necessarily lead to overcapacity is therefore not valid. Indeed, as China’s capital stock per employee is far lower than in, for example, G7 countries it will have to increase its investment levels more rapidly than their for a prolonged period in order to achieve the same levels of productivity which would require roughly the same levels of capital stock per employee.
I think you summed it up best, Michael, in the USA Today article………
“We can’t all export our way out of this problem. Somebody’s got to import, and nobody wants to play that role,”
second place goes to George Magnus……..
“The world can’t cope with the U.S. and China both acting like China,” Magnus says. “What’s going to give?”
http://www.usatoday.com/money/economy/2009-09-02-export-way-to-recovery_N.htm
Is China the locomotive or the caboose?
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Two for the price of one. Food for thought (economics) and trouble (pretty weird as well) in Xinjiang again. How dangerous are these Uyghurs anyway?
I remember hearing that the government wouldn’t let the market fall before the Olympics, but after hitting the peak on October 16th, 2007 at 6,123.04, it lost more than half its value before the start of the Olympics. The bottom was 1678.96 on November 4, 2008.
At around 2850, I think there’s an awful lot more room to the upside than to the downside.
The government will do little things to moderate the swings in the market, like allowing or holding up IPOs, or allowing or banning margin accounts. In the time I’ve been watching (from a distance) I haven’t seen them attempting to do anything drastic, and my impression is that the whimsical, herd-following Chinese investors are largely responsible for short term swings, and foreign investors have been largely responsible for the longer term swings.
Michael, interesting post as always. I don’t know if you intended it or not in a possible poetic fashion, but your usual font has changed to a serifed font like Times New Roman in my Firefox browser with this latest post…
US unemployment is still rising in spite of the seemingly invisible hand lifting them up. This week is down so far, but I believe there might be a fall run up still. Fundamentals always win, however, and fundamentals stink right now. US especially.
The interesting thing is that China seems to be directing the US stock markets right now rather than the other way around.
Interesting stuff about the needles. Odd story for sure.
by “them” I meant stock markets.
Sorry, should have proofread before posting.
Mr. Ross,
From your post, it sounds like you do not ascribe to the notion that the Chinese government pursues an “employment focused” fiscal and monetary policy. Doesn’t investment for efficiency purposes, by definition, put people out of work? I’m in the country and, aside from the government’s stated goal of maintaining employment, I see all manner of signs of an obsessive pursuit of full employment (keep ‘em off the streets). Why does Beijing have no parking meters, but instead, parking fuwuyuan (service people)? Why does it cost more to use an ATM at Chinese banks than it does to go to a teller window?
There is no doubt that a good deal of investment capital is used to upgrade aging equipment and improve efficiency. But the intended effect of that efficiency is to increase output per worker. An increase in such productivity suggests either more output or less worker. I don’t think the 4 trillion was meant to achieve the latter.
As for public infrastructure (rail and highways), under your logic, doesn’t moving goods faster result in less workers employed in such conveyance? If a trucker can now do a Chongqing to Shanghai run in 2 days rather than 4 because of a new toll road, then you need half the labor to move the same material.
As a local, however, I would certainly welcome more rail capacity:-) People outside China may not know that the passenger rail capacity is so impacted and the ticket distribution is so corrupt, that the government prohibits people from buying tickets until 3-4 days before travel. No internet purchases, walk up only if your a normal citizen. This is to try to prevent dishonest agents from scalping the highly prized tickets. Try planning a one week vacation by train when you can’t even buy the return trip until you are at your destination! We won’t even talk about Chun Jie (Spring festival) when 500 million people play musical chairs and try to do so through the rail system.
I don’t know how much of the Chinese stimulus is directed toward expansion of productive capacity vs. efficiency/productivity projects, but I don’t think I would agree that increasing productivity necessarily decreases employment (though it certainly could, I just don’t think it necessary does). If you replace a rail line with a faster one, you might get goods from here to there quicker while still probably employing the same number of people (you might temporarily employ a few more because of all the PR around shiny, new projects like the high speed rail in China).
Similarly, if you replaced a 6 lane highway with a 10 lane one you would gain some productivity and probably end up employing more people in the future to fix potholes the larger road.
I don’t know that ATMs vs. bank tellers or the absence of parking meters are necessarily attempts to increase employment either. I normally went to the bank in Beijing during periods of high demand (lunch time) when there are usually dozens of people in line, waiting to speak with a teller. In that situation I’m happy to spend a few RMB to hit the ATM and not wait in line. Not to mention that for most U.S. banks if you went to another bank’s ATM you would pay a fee (and in the case of Bank of America you would pay their fee plus a BofA fee… double ouch!) but if you just wanted to cash a check drawn on the other bank at that other bank’s teller window you wouldn’t pay a fee. I don’t think anyone would call it an attempt to increase U.S. employment.
As for the parking meters, I suspect it has more to do with the continuation of historical practice and custom. It seems possible that 10+ years ago when things in China weren’t as stable as they are today, people would have either flaunted a parking meter fee and ignored any attempt to ticket them, or people would have simply stolen the parking meter itself (which undoubtedly would be blamed, correctly or incorrectly, on migrant workers from outside the cities (Wai Di Ren).
I’ve been wondering the same thing as John Ross. I have heard that stim spending was going towards things like building rail, schools, hospitals, and clinics. Many things that are social infrastructure rather than “adding capacity”, presumably in the export sector. Does anyone know how the stim plan is being spent, meaning from summary reports totaling up various projects? The info should be there in a command economy, but maybe they don’t publish it.
They also have a huge pollution problem that I’ve also heard there is a push to improve. This is a “cost” without traditional business economic benefit, but sooner or later everyone must do it.
And there is plant modernization, which is an on going expense anyway.
Of course there is a way to kill many birds with one stone. Take a energy intensive biz like steel making or aluminum. Consider it uses coal as an energy source for blast furnaces.
They did license Westinghouse 3rd gen nuclear reactor technology are are starting construction on 4 nuclear power plants (1GigW each, which is about 2x the size of a typical coal plant). In China, with low construction cost and low interest loans, the generation cost per kw is estimated at about a penny. Here our existing coal fired plants are a little under 4 cents/kw.
There are modern electric blast furnaces to replace coal fired furnaces.
Next, find a seaport that receives ore, has a brand new set of railroad tracks to some open land and build a modern electric steel plant and a aluminum plant. Build a transmission line to the nuke plant. You will have the lowest production cost in the world, and also zero carbon footprint.
You will get 100% global market share of steel, aluminum and probably any other metal you chose to go after. A large part of the basic chemicals industry is also very energy intensive. In the US, plants were built near Niagara Falls because of cheap hydro power. This formula works for that industry as well.
So if they do things like this, productivity growth means global market share growth, even if market size is stagnant, which means more jobs. I guess all the coal miners are in trouble, but nothing ever works perfect.
Professor Pettis:
Coming back to your earlier post on China-US bilateral trade surplus, this week’s Economist has an interesting article on China’s “incredibly shrinking trade surplus”.
The Economic Brief article tries to explain the big gap between China’s (smaller) declared trade surplus compared to those of its trading partners.
Differences between exports fob vs imorts cif and tran shipments via Hong Kong (and subsequent 25% mark ups) account for the half the discrepancy between China’s and other countries figures. The rest is apparently due to capital flows reflecdting under invoicing of exports, tax dodges and FDI round tripping to obtain tax breaks. They cite earlier US studies on this issue.
The authors argue that because China is rebounding faster than other countries, the dynamics have shifted from under to over invoicing exports (betting on a RMB appreciation?) — and hence that the recent drop in China’s trade surplus is for real.
This may provide a glimmer of optimism to your worries over global imbalances. regards James
[...] The Shanghai market calls the tune (Pettis) [...]
[...] The Shanghai market calls the tune (Pettis) [...]
[...] The Shanghai market calls the tune (Pettis) [...]
[...] was reading Professor Pettit’s blog and I found his comments on his latest posting, The Shanghai market calls the tune, rather enlightening for me.Here are some of the interesting passages from his [...]
The real question is who and when – who being which political leader and when being the time when true courage manifests itself -I do not see any government or political leader having the right anatomical parts to halt the stimulus packages or at least to reduce the side effects. Not even Sarkozy, who’s been so eager to claim credit, would like to be the leader of the band. If the pullback on stimulus packages is inevitable wouldn’t it be a government sponsored double dip recession?
hmm…
I have to say this is the best explanation i ever heard about market speculation:
Needless to say this begs the question about when exactly should you, as an investor, get out of the market? The day before? But if everyone knows that, then shouldn’t you get out two days before, or maybe three, since everyone has presumably figured that one out too?
haha!
[...] Terrific China watchers blog. Banned in Beijing… as they say.http://mpettis.com/2009/09/the-shanghai-market-calls-the-tune/ [...]
Matt:
If your goal is to merely maintain (not increase) output, then the necessary consequence of efficiency investment is less cost per unit. My point is that the last thing policy makers want in China is to displace workers. Therefore, their policy decisions should logically include consideration of the job loss of a particular action. That is one reason why you continue to have human parking meters.
So, the premise that such industrial investment in China is purely for efficiency rather than increased output does not sound to me like it is consistent with employment maintenance. Perhaps you are right, but then I think the investment decision makers are either a)blind to, or b)they are ignoring the consequence, or c)they buy into the progressive notion that displaced workers can be redeployed into other productive capacities. I doubt they believe option c.
As to cheating, have you ever parked here? You pay one price if you want a receipt (fa piao) and you pay a lower price if you don’t need the receipt (in essence the attendant pockets the cash).
Cedric, you hit on the issue. There is little transparency as to where the stimulus money is going.
[...] He’s only batting 50/50 or so… or not. Be careful in calculating the batting average as # right / # of total predictions. Sornette addresses this issue in chapter 9 of his book. Calculating probability of predictions in a time series is bit more complicate than that and I will not pretend to understand them (I pulled out of math into finance after taking probability). Scan a few pages using Google – the results are much more meaningful than 50/50. China. A bounce in a secular bear market has a more limited possibility of bullish events. There will not be the same exuberance flowing through the globe in larger and larger waves raising additional capital from dumber and/or more momentum driven investors. However even within the confines of a secular bear, Chinese government can theoretically infuse even more capital/credit/leverage into the system and thus blow the predictive value of the Log Periodic Power Law (LPPL) parameters (related to meta-prices). Although such infusion is more likely, if stocks start breaking to lower lows as opposed to pulling back from the recent highs (it seems like they’re determined to continue pumping money into this thing through 10/1 at least). [...]