China: What Comes After the Olympics? 14 comments
-
Font Size:
-
Print
- TweetThis
The Olympics are finally over, and with a spectacular ending that reportedly had Jimmy Page performing “Whole Lotta Love”. I didn’t see the performance – I was in a park just south of the Olympic Stadium with three friends, trying to get a glimpse of the fireworks – but I am definitely curious to know what the very prim leadership were thinking as the guitar chords crashed about and as someone (presumably) screamed out “Wanna give you every inch of my love” (although perhaps in deference to the local leaders they skipped the vocals).
Whatever the fate of the Olympics, the up-and-down struggling in the stock markets that characterized the Olympic period is certainly not over. On Friday, the last trading day of the Olympic period, the SSE Composite declined by 1.1% to close at 2405, which brings a net loss of just over 11.8% for the SSE Composite since August 8, the day of the Opening Ceremonies.
Today, the market bucked the trend (sort of). After a quick downward break in the first half-hour of trading, the market recovered and was pretty strong for most of the day. The best performers were the banks, who have been reporting good earning growth. In the last hour of trading, however, on admittedly weak volume, the market suddenly gave up most of its gains, with the SSE Composite closing the day at 2414, up by just under 0.4%. The Shenzhen markets did not do as well, and most Shenzhen indices ended the day down by 0.4-0.5%.
I spoke to various friends in the market to get information on what has been driving trading, but it was hard to get a sense of strong conviction either way. Economic numbers are ambiguous, and I think most participants are hoping for some sort of fiscal stimulus, while at the same time dreading that it won’t make much of a difference anyway. I think there is also a lot of nervousness about a psychological post-Olympic let-down. After all the anxious excitement of the Olympics, with the constant, non-stop coverage in the press and on television, there will be little left of the color and excitement and a lot of work repairing the disruptions. I don’t know when and how the many migrants and poor who were ejected from the city will return, but I would guess that their welcome will be muted. Meanwhile we have been getting sporadic press reports about the cost to farmers within the region of the Olympics water policies.
The main thing is that now that the Olympics are finally over, we should quickly return to a less colorful reality, and policy-makers and analysts will get back to trying to figure out what the next few months are going to look like. Today there was confirmation of sorts of the fiscal stimulus package reported last Tuesday in a JP Morgan note. One of the most widely read of local financial periodicals, the Beijing-based Economic Observer, had an article in today’s paper citing unnamed sources who claimed that the CPC’s Central Financial Leading Group had put together a fiscal plan to support a faltering economy, although this plan had yet to be revised by the Ministry of Finance or approved by the state Council.
According to the summary of the article on the newspaper’s website (which, by the way, seems to mistake the JP Morgan note for a “Morgan Stanley report”):
A market report stating that high-level Chinese officials were considering a 200 to 400-billion-yuan economic stimulus package has led to temporary surges in stock prices and debates amongst economists. Though no forthcoming official confirmation since the Morgan Stanley report was released on August 19, the EO learned from sources in the Ministry of Finance that an "expansionism" formula was under study in case the economic growth slowed further.
The proposed formula might include 150 billion yuan of tax incentives and 220 billion yuan of additional expenditures, mainly to be spent on public facilities and services. Some held that the Chinese market was still growing healthily and that such interventionist measures were unnecessary.
If there really is such a program and if it is executed, and the newspaper cites an unnamed MoF official who claims that the proposal would have to go through many more stages before it became policy, the total fiscal stimulus would amount to a little under 1.5% of GDP.
According to Ministry of Finance (MoF) statistics, China’s total revenue in July was RMB 532.325 billion, an increase of 13.8% over the same month last year. But this growth rate is 19.3 percentage points lower than in July, 2007, and 19.7 percentage points lower than the growth rate in the first half of the year.
The article goes on to say most sources of tax revenues showed sharp declines in growth rates, with corporate income tax actually down 4.2% from last July. Comprising RMB 149.6 billion of China’s total tax revenues of RMB 5323 billion for July (28%), the decline in corporate income tax was credited by the MoF to:
a decline in companies’ performance. Between January and May, profits of industrial firms with annual sales revenue of more than RMB 5 million increased by 20.9%, a growth rate 21.2 percentage points lower than in the same period last year. Due to RMB appreciation and raw material and energy price hikes, in the first half of the year about 65,000 small and medium-sized enterprises went broke.
I haven’t looked at these numbers beyond the ChinaStakes article and I am very far from being any kind of expert on the fiscal revenue and expenditure side, but I do think it is worth noting that these numbers seem extremely volatile. I have mentioned several times in the past my concern that the surge in tax revenues over the last four years has been more than matched by a surge in fiscal expenditures, but I suspect that if something were to diminish or even reverse revenue growth (an economic contraction, perhaps?) it might not be quite as easy to slow expenditure growth in line with revenues.
Professor Liu Heng of the Central University of Finance and Economics said the tax decline would likely continue due to the economic slowdown but would not largely affect fiscal expenditure. On July 8, the MoF warned departments to be ready for pressure on spending in the coming year. In the first half, budgeted income of local governments was RMB 1.526521 trillion, and the budgeted disbursement was RMB 1.806929 trillion, showing a deficit of RMB 280.408 billion.
Meanwhile, tax from land and real estate, a major source of the local governments’ incomes, has also declined drastically. In July, land-related tax increased by 79.4% over the same month last year, for a total of RMB 14.306 billion, but this was 25 percentage points lower than in July 2007.
Land transfer income has also decreased, due to the real estate market doldrums. This income should have been included in the government’s budget but, in fact, has not been, so the budgeted incomes of local governments don’t represent their real income level.
Liu Heng thinks the tax decline “won’t be a big problem”, since China has put a certain amount of money from its tax income every year into a rainy day account.
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Philip Davis
-
3
Bill Gross
-
4
Tyler Durden
-
5
TraderMark
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 14 comments:
I live in Beijing.
China Mobile May Report Record Profit on Subscriber Additions
www.bloomberg.com/apps...
Quote 1: "... put together a fiscal plan to support a faltering economy..." China's economy faltering? It's growing at about 8 to 9% and people call that "faltering"?
Quopte 2: "...the tax decline would likely continue..." Tax decline really? A few lines earlier I read that the tax is growing at 13.8%. For most other countries, tax collection growing at 13.8% will not be called a decline. Yes, there is a decline of growth but not a decline in tax collected. Personally, I like the tax growth to slow down to below GDP growth or lower. The lower tax the better let alone growth.
Seems like, for some people, China can do nothing right. Growth of over 10% = overheating; less than 10% = slowdown. Tax growth = government grabbing too much from enterprises. Reduction in tax growth = proves decline in economy.
Having been in China for the past 20 years, I see the economy is better than ever before (by most measurement). There are problems probably more of a growing pain but nothing fatal. I don't see doom and gloom. I see the future being quite bright. The people appear to be very happy overall especially after hosting such an successful Olympics. Maybe I just wrote something here that is not politically correct but that is what I really believe in based on my experience. Maybe those that are viewing China from far away see things that I don't. Normally, it should have been the reverse, i.e., people close to the scene seeing the sick tree but those far away seeing the healthy forest. I think I do see both the trees and the forest - in my humble opinion.
It is the Communist Politburo that is "deciding" that the Chinese communist, er, Chinese capitalist economy will grow more quickly during the next five years, not the markets.
The Politburo has also decided, among many other things, to let the dollar rise against the renminbi. But some people think it's best to let markets decide these things. When central governments decide, sooner or later markets take their revenge.
Some Americans think that government can do no right. The Chinese communists think it can do no wrong. Surely the truth is somewhere in the middle?
China has indeed been enjoying advantages and her momentum, but problems are out there. Income disparity [albeit universal, but I'm sure you get my drift], social inequality, distrust amongst people and organizations, etc. equity market and housing market are merely exhibiting characteristics of reflexivity, a reflexive relationship, imo. What's going on deep inside is what people, in Zhong-Nan-Hai need to be looking at and figure out what to do next.
NSSF has just invested in [yuan-denominated] two domestic PE funds, SAFE has invested in BP and Total, whilst CIC's current folio has apparently been plunging. All these reflect that at some point, if not properly put, Beijing is panicking and is desperate to do something about the reserves it owns and liability it comes with. 20 Years ago [or even less], there was no properly established social security system, and now what they have is sth. pretty much mimicking 401(k), plus, it is the Chinese generation X, if you will, are footing the bills for the older generation. Maybe I'm exaggerating, but doesn't this look just a bit like ponzi scheme, albeit systematically carried out and probably will work better later on.
I'm not criticizing nor anything, I'm just saying it is crucial to point out existing problems, identifying them and hopefully people sitting on the chair would come up with something more concrete at the end of the day.
From Epoch Times today.
en.epochtimes.com/n2/c...
The Root Cause of China's Recent Stock Market Decline
Luo Xinhui, Special to Epoch Times Aug 24, 2008
China’s stock market plummeted to a Black Monday again on August 18. The benchmark Shanghai Composite Index closed at 2319.87, down 62 per cent from its high at 6124.04 in 2007. The Shenzhen Composite Index closed at 7833.09, down 60 percent from its high at 19600.03 in 2007.
A fall like this within ten months is rarely seen in the world. According to analysts, the trading volumes of the two stock exchanges were at a record low recently. The market is dominated by caution and pessimism.
Technical and fundamental criteria can no longer be used to predict the stock market index’s performance. If this is true, then perhaps we need to analyze the actual situation of China’s stock market.
Official Explanation for the Fall
Many economic reports published by China’s state-run newspaper cited the sub-prime loan crisis in the U.S. and the roaring oil prices as the major cause of the sharp fall in China’s stock market. This is much like the National Bureau of Statistics of China’s claim in a recent economic report that the price surge in the global market was the major driving force for inflation in China. It seems that with today’s economic globalization, problems in China’s stock market have a lot to do with global economics.
However, the United States, the source of the sub-prime loan crisis, only had an 11 per cent drop in the Standard and Poors Index, whereas China is the country that has suffered the greatest loss in stock market value in the world. Does the U.S. sub-prime loan crisis have the greatest impact on China’s market?
When oil prices soared, the stock market declined in countries that rely heavily on oil. However, Europe and the U.S. have never exceeded an 11 per cent loss in value. Does the oil price also have the greatest impact on China’s market? Besides, oil prices have already started to decline recently, yet China’s stock market continues to fall. Why did this happen?
It is generally recognized that tightening monetary policy by China’s Central Bank to prevent inflation is a domestic factor that caused the sharp fall in China’s stock market. Nevertheless, despite the Central Bank’s many increases in interest rates, the interest rate on people’s savings accounts is still negative compared to inflation. Under such conditions, as long as the market is stable, capital should still enter the stock market. In addition, capital liquidation is still high in the domestic capital market.
A Lack of Confidence
Recently, the Chinese government apparently realized this also, and has repeatedly emphasized that the stock market plummeted due to investors’ lack of confidence.
What the government said was right, about confidence. But the lack of confidence is the “consequence” instead of the “cause.” What should investors’ confidence be based on? How did investors lose confidence? I think the performance of the stock market in recent years should have indicated this to investors. Accordingly, whether it was the prediction of a future strong market, as claimed by high level officials and media; or even the renowned Chinese economist Wu Jinglian, who held the view that China’s stock market would suffer a great loss, but recently emphasized the sensibility of rescuing the market—the stock market simply did not react positively to any of these statements and continued to plunge. Over 90 percent of investors have lost money.
Other commonly mentioned factors are, for example, lifting of ban of non-tradable shares and Ping An Insurance’s plans for massive stock and bond offerings. These are not normal factors in the first place. Instead, these are a direct intervention of administrative power, which has caused the stock market to fall. Who approved these plans? Who made the decisions? Without the consent of the Securities Regulatory Commission, would China’s Ping An Insurance announce its massive offering plans on its own? And those unusually high IPO prices of some companies—can this happen without the consent of the Security Regulatory Commission?
The Truth about China’s Stock Market
The truth about China’s stock market is actually not a secret, and most investors probably already knew it. That is, China’s stock market is a tool used by the government to re-distribute and re-organize social wealth on a grand scale, which means that it is a tool to clean out Chinese people’s savings accounts. The biggest winners in this process are, of course, government officials and their relatives who are the most well-informed about the actual value and re-organizing plans of those that control state wealth; as well as institutional investors who collaborate with them and who rely on insider tips to control the stock market. Those people have already made huge fortunes in the process. This is the truth about China’s stock market.
Actually, the goal of China’s stock market was not purely an economic one when it was originally established. When former Premier Zhu Rongji set up stock market in Shenzhen, he said that China’s stock market was meant to get money--to get money in the market and give it to companies that were unable to get money, and because these companies were unable to make money, they needed monetary support.
In Western countries, a fundamental criterion to allow a company to be listed is that the company must have performed well for at least three years while meeting other standards. The company must obtain approval from the Securities Regulatory Commission prior to issuing stock. Under supervision, the issued stock can also be pulled from the market to ensure and safeguard in particular small and medium sized investors.
China’s stock market has been established to operate like an ATM for the listed companies. For the majority of the listed companies, economic reform is nothing but a mechanism to trap money. Many heavily indebted State-owned companies have been listed in the stock market after re-packaging. All of a sudden, they become the new stars in the market with easy loans and finance. Chen Yea-Mow, Professor of Finance at San Francisco State University indicates, “The Chinese listed companies’ profiles are questionable. In fact, the truly good and strong companies are rare in the Chinese stock market.” The foundation of a stock market is the listed companies. With a weak foundation, how can any high stock price be affordable? The deflation in stock prices is therefore predictable.
Other than the fact that the listed companies would benefit from the weak structure in the Chinese stock market, the true “beneficiary” of this contrived structure is the “interest group” who would profit from the initial establishment of a listed company and the trading thereafter. As for the investors, China’s stock market serves to mentally “entertain and exercise” them. It gets investors far more emotionally involved than any intellectual game could hope to.
In an interview after the market dived for several days prior to the Olympics, economist Tang Min points out that, “No economists can make sense of China’s stock market.”
“I’d advise the investors to give up the illusion that the government would restore the stock market or that the market will rebound. Escape China’s stock market while you can. If you insist on trying to profit from it, go ahead. However, do not complain if you are drained empty.”
Some say that entering China’s stock market is like gambling. That would be over-estimating the capacity of the Chinese stock market. Gambling relies on luck, and sometimes strategies—it still has fairness in it. However, China’s stock market is a manipulated and systematic black market. The majority of Chinese investors seem to have gradually recognized this. This could suggest that the end of this massive robbery is near.
Can China’s Stock Market Be Independent of the Government?
Since the fall of China’s stock market, investors have been very disappointed in the government for not rescuing the market. Some investors complain that when the U.S. stock market fell 10 per cent, the U.S. government invested 200 billion dollars to save the market. However, China’s stock market has fallen nearly 50 per cent, and yet, the Chinese government has taken no action. According to Chinese Finance magazine, “China’s stock market cannot, could not, and should not be saved.” This might be consistent with the ideas of many experts and economists, that is, it is better for the government not to intervene in the market. However, can China’s stock market truly be a market independent of policy and the authority (administrative power)?
This is a challenge to the current system. First of all, the major and powerful players of the listed companies in China’s stock market are so-called State-owned businesses. According to the Chinese legislature, the State Council is the ultimate representative of the State-owned properties. But, both the China Securities Regulatory Commission and the China Banking Regulatory Commission are agencies under the umbrella of the State Council. This is like a football game where the government is both the referees and the athletes. Furthermore, the government is also setting the rules and changing the rules. Who would believe that independence or fairness in the stock market will ever exist?
Secondly, many influential economists in China are also the independent directors of many listed companies; some are even connected to the company financially. Many CEOs of major listed companies and funds are also members of the Securities Commission, Exchange Commission, and other government agencies. How can China’s stock market remain untainted from these complicated and complex relations and prolific insider trading, pushed stock prices, and administrative manipulations harbored in the system?
Furthermore, a significant factor of a capital markets is fairness, which is ensured by the free flow of information, and relies on media freedom. In China’s stock market, analysts serving in the media are those who pass the official qualification exam. Those who don’t “obey” will have a hard time passing such an exam. Moreover, there are rules to follow in the Chinese media. The analysis must comply with those rules. Didn’t CCTV’s economy program get shut down because of a few “honest” words? Ordinary shareholders can do nothing but follow the rules. It would be a miracle if the shareholders did not end up losing money.
Shi Hanbin, a Shanghai finance expert said, “However, I hoped the August 8 Olympic Opening Day would save the market.” I have said it before: “Always analyze based on the true interest, discard any expectation, and stay completely cold-blooded to maintain a complete calm. Obviously, I have not reached that level myself. I have ignored a key factor: The atheist [cadre] knows no limits.”
Shi’s sentence might be the most fundamental answer to the current market’s situation.
The Root Cause of China's Recent Stock Market Decline
Great Read!
en.epochtimes.com/n2/c...
Can I help answer any more questions on China's mobile networks? Apologies as I did not mean to be rude.
Jason