Rice and Margin

In Friday’s China Daily there was an article titled “Pledge not to stop rice exports lauded.”  The article states that COFCO, China’s leading grain, food oil and food import and export group – which apparently exports rice equal to 1% of the volume of internationally trade rice – will not cut rice exports. 

Given China’s own food supply problems, this is a commendable move if true because, as far as I understand, the supply of rice is close to crisis proportions in many Asian countries.  And of course it doesn’t make China’s own food supply problems any easier, although my back-of-the-envelope calculation is that this probably affects less than one-half of one percent of total Chinese rice production. 

I suspect that a number of major governments along with the appropriate agencies – perhaps the World Bank and the Asian development Bank – are going to need to organize some coordinated response to the rice problems.  Perhaps China can take the lead here.

On a separate note, there are very persistent rumors, and some supposed quotes from unnamed sources at the CSRC, running around about the CSRC permitting margin purchases of shares.  In the past, Chinese investors were required to put up the full amount of their share purchases and were not allowed to use leverage for stock investment purposes (although there have apparently been many ways to get around this regulation). 

If these rumors are true, and the CSRC does begin to allow buying on margin, I suppose we can add this measure to the number of administrative measures in the past few months aimed at supporting the market – increasing QFII quotas, permitting the launch of new funds (after they were stopped last year in the heat of the bull market), constraining the sale of strategic share holdings and new share sales, and most recently reducing the stamp tax.

If they do permit margin purchases, this would certainly add buying power immediately, and so might result in a surge of buying if there is real desire on the part of investors to increase their exposure.  Nonetheless, I hope they don’t do it. 

I think in the past they have been wise to limit leverage and derivatives in the local markets because these can significantly increase the power of speculative traders, and that automatically adds volatility to the market – something of which we don’t really need more.  The argument that these types of instruments can also be used for hedging purposes or for more efficient capital allocation decisions does not hold in China, in my opinion, because the structure of the market precludes the existence of the types of investors who would use these instruments for non-speculative purpose.  I explain why I think this in my entry for January 2.

Comments

[James Lewis:]

Whoever idea this was, in about two years he will be known as the idiot who brought everything down in China.

The effects will be far reaching and it will set off a chain reaction that will destroy China big ppna of becoming the biggest economy in the world.

It will take the stock market down
It will take the property market down
It will take down the ability for China to produce cheap goods
It will destroy the perception as China being a good place to invest
It will create horrible social problems

It is the signle most stupid idea I have every heard.
The only reason the Shanghai market did not go to 8000-10 000 was because most people did not have access to leverage. Therefore they could only GAMBLE with what they had themselves.

If you give everyone margin, we are going to see the most rediculous rally ever. All the excess capital is going to flow into the markets. China has enough problems as it is, let alone creating more credit for people to gamble with. The market is too young, too structually poor. And financial conditions do not warrant any behaviour like this.

How China can say it has tightening policy is beyond me.


Have any of these guys studied economics?
If this happens we will see double digit inflation, the market making new highs and my property investments going through the roof.

This is quite possibly the biggest mistake I will ever seen be made in my lifetime. One things for sure though, we'll see some pretty amazing asset appreciation followed by some pretty horrible deflation. The deflation will not be as bad as Japan, but it will be serious enough to knock China back on its path.

The Politburo needs to get some outside help now.
Because frankly the monster they are creating is getting bigger and they keep on feeding it steroids. When he is let out he is going to cause havoc.

Well we all wanted to know what would breakt the camels back.

2008 Apr 29 04:05 AM

[city:]

sell china and buy citi; let's pay another 6billion to our American Idol Prince Chuck.

2008 Apr 29 07:14 AM

[thechinasto...:]

HI City. Funny enough Jim Rogers is buying China and still shocking citi and other banking stocks.

About the rumours. I am not sure about margin purchasing but I am very sure that they are allowing derivatives. Derivatives will allow the Chinese to short the market as well as to long it. Therefore the market would not always go up up and up. The derivatives will absorb some of the excess liquidity is in the Chinese market.

2008 Apr 29 08:23 AM