FINANCIAL NEWS
pictured: Chinese capitalists collecting used bottles for resale
The word on the street is: sell China. Various macroeconomic factors are turning to shit there, particularly inflation, but the key problem is the incestuous lovefest developing on the local Chinese stock market. Chinese companies are rediverting revenues away from investment in organic growth – and, increasingly, borrowing money from banks – in order to invest it in the Chinese stock market. Given that Chinese companies are the Chinese stock market, they are effectively investing it in each other.
Clothing manufacturers and steel factories are setting up whole separate investment divisions, often secretively and in violation of financial regulation, to buy other companies’ stocks. This creates a weird virtuous cycle. Acme China buys stock in a whole bunch of other Chinese companies, pushing their stock price up. But Acme China’s stock price is affected by the performance of its investments, which are going up. So Acme China’s stock price goes up, encouraging other companies to buy Acme China’s stock, which in turn pushes their stock price up because they hold Acme China’s stock and it’s doing well, so Acme buys a bit more of their stock, and so on. So on, until someone calls bullshit on the whole thing, and the virtuous cycle becomes a vicious cycle: Acme China has a lot of overvalued stock, so other firms sell Acme China stock, lessening the value of their investment portfolio, so Acme sells their stock, and so on.
Bubbles form and pop all the time, but it’s particularly dangerous with China for two reasons. The first is just the sheer scale of its economy. This is one big fucking butterfly to start flapping its wings. The second is the primitive nature of its financial services industry. Over the last ten years, the Western financial services world, led largely by the City of London, has realised that bankers can make huge amounts of money by spreading risk around a broad range of investors. This has had the fortunate effect of stabilising the global financial markets, because when things go wrong in a particular market, a lot of people take a small hit, rather than a few people taking a massive hit. The imminent collapse of the US sub-prime (aka junk) mortgage market will probably not cause the collapse of the US economy, as the banks and lenders who wrote those crappy mortgages in the first place have since sold on that risk to a diverse range of other investors, who will simply have to make do with a cheaper brand of port this Christmas.
Clothing manufacturers and steel factories are setting up whole separate investment divisions, often secretively and in violation of financial regulation, to buy other companies’ stocks. This creates a weird virtuous cycle. Acme China buys stock in a whole bunch of other Chinese companies, pushing their stock price up. But Acme China’s stock price is affected by the performance of its investments, which are going up. So Acme China’s stock price goes up, encouraging other companies to buy Acme China’s stock, which in turn pushes their stock price up because they hold Acme China’s stock and it’s doing well, so Acme buys a bit more of their stock, and so on. So on, until someone calls bullshit on the whole thing, and the virtuous cycle becomes a vicious cycle: Acme China has a lot of overvalued stock, so other firms sell Acme China stock, lessening the value of their investment portfolio, so Acme sells their stock, and so on.
Bubbles form and pop all the time, but it’s particularly dangerous with China for two reasons. The first is just the sheer scale of its economy. This is one big fucking butterfly to start flapping its wings. The second is the primitive nature of its financial services industry. Over the last ten years, the Western financial services world, led largely by the City of London, has realised that bankers can make huge amounts of money by spreading risk around a broad range of investors. This has had the fortunate effect of stabilising the global financial markets, because when things go wrong in a particular market, a lot of people take a small hit, rather than a few people taking a massive hit. The imminent collapse of the US sub-prime (aka junk) mortgage market will probably not cause the collapse of the US economy, as the banks and lenders who wrote those crappy mortgages in the first place have since sold on that risk to a diverse range of other investors, who will simply have to make do with a cheaper brand of port this Christmas.
China, however, is still cowboy country when it comes to financial derivatives and risk management. The banks there are shouldering most of the risks themselves. If things go tits up, banks may collapse. This is rarely a good thing, although I would probably welcome the collapse of NatWest. In China’s case, it could be catastrophic. Sell, sell, sell!
posted by oliver at Wednesday, July 11, 2007
<< Home