Wednesday, February 28, 2007

Understanding The China Market Decline Better

As I suspected. The Chinese market swoon was "engineered".

One of the links to the right is for Strafor.com. Stratfor is like having your own CIA. It is a service which I gladly pay my hard earned money to gain objective intelligence on geopolitical matters. What? I'm going to rely on the New York Times, or the Washington Times? Oy, I like to be well informed.

Here are a few excerpts of the Strafor take on the Shanghai market debacle:

The Chinese government has become increasingly concerned about levels of investment in its economy or, more accurately, the sheer amount of money that is chasing projects. State firms with limitless access to subsidized capital from state banks have used that access to launch thousands of nonprofitable firms. This glut in "investment" money drives up the cost of commodities and adds industrial capacity without actually producing anything of much use, making life more difficult for the average Chinese and unduly harming relations with foreign powers that face a glut of otherwise noncompetitive Chinese goods. This penchant for over investment has now spread to the stock market in two ways. First, the same politically connected government officials who started dud companies are taking out loans to buy shares, or are using shares they already hold as collateral for new loans. Second, ordinary Chinese citizens have started borrowing -- sometimes against their homes -- in order to play the market. In January, the number of total traders on the Chinese exchanges grew by 1.38 million, an increase of 134 percent from a month earlier, while stock turnover was up 700 percent from a year earlier. The net result is an absurd stock surge with no basis in fundamentals. At present, some Chinese banks now have price-to-earnings ratios higher than financial behemoths such as Deutsche Bank and Chase, despite deplorable management and a history of highly questionable lending policies.For the past few months, the government has been working to drive down this speculative investing. On Feb. 26, China's State Council launched a new "special task force" that accurately could be referred to as the "get-those-idiots-to-stop-borrowing-to-gamble-on-the-stock-exchanges" team. Its express goal is to get the Chinese domestic security brokers to lay off such speculative decision-making, while also putting a crimp in the source of the subsidized capital. Day one started by the script, and Beijing is likely quite pleased with the way things are going (or at least it was until its actions unintentionally triggered a global meltdown). Also, since the Shanghai exchange is actually still up 3 percent for the past week despite suffering its largest drop in a decade, the State Council probably hopes for more drops in the days ahead.

There's quite a bit more to the article, but Stratfor doesn't want me to duplicate their entire report. It is worth subscribing to their service by clicking the link to the right (and I am not compensated for sending you there).

But I'll throw in two more lines for your consideration from Stratfor:

"...the Chinese believe their exchanges are massively overvalued (hence the engineered crash). They will do this again, and are not (yet) particularly concerned with the international consequences."

"...everyone else now is going to chew on the fact that Beijing did this intentionally."

3 comments:

Bill Luby said...

Great stuff, Jim. This will give me a lot to chew on as I watch events unfold in the near future and contemplate different ways to reposition my portfolio.

OptionPundit said...

Great information Jim. Surely helps developing a bigger perspective.

Jim K said...

thanks guys!