Thursday, January 03, 2008

Why China's Market Must Crash

From Al Fin:

... markets only work when they are allowed to work their way. If you try
too hard to manipulate a market, it is the market that will have the last laugh
on you. Leaders of the CCP in China have not learned that important lessons
about markets yet--but they will.

In a normal stockmarket, speculators can deflate bubbles by shorting
shares. That is illegal in China. In a normal stockmarket, investors can reap
large rewards by having their investments bought in a heavily fought
acquisition. In China, an acquisition must survive central planning (and often
doesn’t). Most of all, in normal markets, share prices are based on how a
substantial amount of the shares in a company trade. In China, shares in many of
the benchmark companies are held by the company or the government and do not
trade. Prices are determined by just a few shares being batted back and

If only a few shares are determining the overall valuation, it means only a
few people need change their opinions for the market to unwind.
Normally, a counter-balancing force for a
sudden panic comes from contrarian-minded investors who believe an objective
understanding of information provides a reason to buy shares as their prices
become more reasonable.
Put simply, crashing prices are an opportunity,
not just a problem.

But finding objectivity in the Chinese market is no
easy task because information disclosure is wretched. Companies, and the
investment banks that coddle them, distribute information to favoured investors
but not to the market at large.
For its part, the Chinese government
broadly abets this process, granting selective permission to favoured foreigners
wanting to invest.

These insiders are comforting friends for China to have, but they are
insidious forces for a genuine market. Instead, China needs disinterested
outsiders—and insiders—free to do research, free to buy and free to sell. Yet
the market in China has become an example of moral hazard gone wild.
Historically, this is not uncommon. Markets work in nasty ways and countries
frequently try to control them. Critics are faulted for misunderstanding the
local “culture” or for missing the crucial fact that this time, really, is
different. And then, inevitably, there is a crash.


Furthermore, the LA Times catches up to a story the Astute Bloggers broke quite awhile back. China's economy is 40% smaller than previously thought:

The most important story to come out of Washington recently had nothing to
do with the endless presidential campaign. And although the media largely
ignored it, the story changes the world.

The story's unlikely source was the staid World Bank, which published
updated statistics on the economic output of 146 countries. China's economy,
said the bank, is smaller than it thought.About 40% smaller.

China, it turns out, isn't a $10-trillion economy on the brink of catching
up with the United States. It is a $6-trillion economy, less than half our size.

For the foreseeable future, China will have far less money to spend on its
military and will face much deeper social and economic problems at home than
experts previously believed.

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