China Law Blog

I still think that if the quants in the PBOC get the slightest wiff of a significant downturn there will be a sudden "technical issue" with the electronic trading system and the whole thing will be taken off line for an indefinite period of time until the numbers can be fudged enough in the system to stop any massive sell-offs.

The 4 state banks and large insurance companies may be given some of that 1.3 trillion USD in forex to go on a stock buying spree to prop up the market, though all of that will be done through second and third parties.

"...economist's predictions are correct about half the time."

Ha! Flip a coin, then. Same odds.

Economics is a profession in which you can enjoy a long and successful career without once having been correct in a prediction.

In my blog, I recently discussed the tendency for professionals in almost any profession to be unable to recognize the limits of their expertise.

I simply can not take that article seriously. "To see why a crash may be coming, it is worth examining the behavior of the China Investment Corporatio..." so begin the real meat of the article...

The evidence of "lack of a rational system of capital allocation." is the fact that CIC is not putting money into this or that... well excuse me but CIC is only a few month old and certainly is not Abu Dhabi or Temasek just yet because at the moment it is a 30-people shop that's still recruiting people and being setup. To sell short CIC at this point is a bit hasty.

Then the author proceed to talk about Japan in the 80s or 90s, a sure warning sign for ignorance when someone makes this comparison against China.

Ends up the article nicely with pep talk about democracy as well as "seeking a military adventure abroad to occupy the masses of disaffected youth and distract the public from its new poverty."

Had the guy just stick with the overheated stock market I'd have taken him more seriously.

The Chinese stock market will never crush. If there is any hint of that happen, the Chinese government will step in, using administrative measures, monetary measures, fiscal measures, as well as jumping into the market with both feet, to bail out the market. And since majority of the profits from most major corporations in China are paper profits they made in the market, and that most of these are relying on the Chinese government even to exist, the Chinese government can easily order all these to cease trading while government owned investment funds to prop up the price. The Chinese government, with its huge foreign exchange reserve, can borrow a lot of money to finance such prop ups, and will not reduce their liquidity. After all these settled, the government investment funds may even make a comfortable profit.

Hmm, it's odd. China seems to be an insanely complex organism; and even these extremely smart people tend to get these things wrong (which begs the question, if my intellectual superiors are wrong, then what chance do I have to be right?).

Remember the article by the MIT professor accusing China of fudging its growth statistics in 2006? And even James Fallows (twice Harvarded, if I recall correctly), after a year in China, is still posting softcore pieces; to be honest, the most interesting thing he's said about China is a once-distilled idea; he gave a short series of paragraphs on the intellectual state of the CCP; the top levels are humble and not arrogant about the state of China; they don't think the Chinese development model can be exported and are anxious about the state of the country, society, and economy. That passage was an observation, a good one, but it was not sufficiently synthetic.

Whether you agree or disagree with Tyre or other predictions of an eventual government bailout of the market, it has to make even amateur economists shudder.

Moral hazard, anyone?

I have no data beyond apocryphal conversations with a handful of local investors, but the common theme is an implicit belief that the government will not allow your average Chinese punter to lose money - no matter how leveraged a punter might be.

We then have to ask: to what extent are Chinese betting the farm on shares because they believe their investments to be guaranteed by government largesse that will be used to avert political crisis?

If the government is really serious about curing China's equity narcosis, they should start by disabusing the public of any notion of a government bailout.

Or maybe they fear that the reaction to such statements would be sufficient to set off the crash.

The essay uses a number for the amount of bad loans in the system by Ernst and Young that we discussed and debunked earlier in this blog. (It's a sad day when an accounting firm can't add.) It then waves its magic wand and then assumes that the number is even worse than before.

Honestly, I don't understand why people even bother quoting statistics in this case. If you think that the Chinese economy is going to collapse just because you think so, just say that. Taking a number putting in a fudge factor, and then handing it to the next guy that takes the number and puts in a fudge factor doesn't seem to be useful.

David: implicit belief that the government will not allow your average Chinese punter to lose money

On the other hand, there is a self-selection bias. Anyone who thinks that the government will let the markets fall probably isn't invested in them.

The Chinese stock market will likely crash in the next few months, but since it's not likely to be a big deal.

Twofish, I love your blog (when you aren't talking about your personal life, after the first ten thousand words, it seems more of the same).

So, sir, I know you're busy with playing the markets, but could you spare the time to explain why China's stock market collapse won't matter, and for that matter, why a stock market collapse in a developed economy matters?

lnst: So, sir, I know you're busy with playing the markets, but could you spare the time to explain why China's stock market collapse won't matter, and for that matter, why a stock market collapse in a developed economy matters?

I don't play the markets. Under the best of conditions, it's random. If it isn't random, it isn't going to be non-random in your favor. Put some of your money in an index fund, and most of your money into books and tuition since the payoff for that is far higher than anything else.

Anyway......

A Chinese stock market collapse won't matter because stocks make up less than 3 percent of total Chinese savings with about 90% in the banks. (And before someone brings up that Morgan Stanley report about how stock market earnings are boosting profits, let me point out that 1) that they are one-third of profits, not one third of earnings, big difference, and 2) I'm not sure they've correctly accounted for state holding companies versus listed companies.)

They would matter in the United States because people have a much larger fraction of their wealth invested in stocks.

They *really* matter in Japan since unlike China and the United States the major stock market investors are the banks, and if the stock market falls too low, all of the banks start going bankrupt.

This is a good piece in so far as it gives our kebab boy two pieces of orgasm :- )

So, uh, I'm curious, what's the source of this statistic?

@fos:

I really don't believe that Beijing will let the market crash, as I said before someone will pull out the power plug before that happens, and such a crash wouldn't affect the world as China still isolates its economy and stifles cross-border money flow by MNCs and foreign investors, so the damage would be self-contained.

It doesn't take an econ student (which I was) to realize there are 2 areas in China that appear ripe for a crash, the stock market and the apartment market. Price levels in both are completely irrational, the only question seems to be when?

I don't think a market crash will have a great impact outside of China and I don't think the government will get actively involved. As I see it, when it looks like things will go south in a hurry, the bigtime investors will pull out, speeding up the crash, and the small players, the laobaixing, will get screwed.

Beijing has let the stock market crash before. It will let it crash again. Already the market is -20% from its highs.

Also a "stock market crash" isn't going to matter much. A general Chinese economic crash is going to kill the world economy. The US economy is dependent on Chinese savings. The Chinese economy is not isolated and everything that goes on in China impacts the world and vice versa.

Very informative. This will be very interesting how this effects other world markets.