chennian

The Shanghai Market Calls the Tune

I generally agree with you on that when government takes on the liability, it nurtures future bad behaviors. But it might be very much different for China's SOE. Because the government can explicitly order a stop on SOE's derivatives trading. It actually did. If you were the trader for those SOE, you would be out of job.


On Sep 04 12:41 PM James Lewis wrote:

> Michael, have you been picking up on Chinese SOE's plan to cancel
> derivatives contracts with the Western Banks because they are so
> underwater. This is what sent shockwaves through the market recently
> both from the angle of the state of the SOE's, but also putting the
> whole financial market framework under risk. It poses the question
> if the SOE's can refuse to honour derivative contracts (backed up
> by the central government), then is there any stability in the market
> framework.
>
> Liu Xinhua comment about stability etc i feel was also aimed at re-assuring
> everyone around these issue of cancelling the contracts.
> It is very obvious that the losses taken on these contracts are truly
> huge. In fact I dare to say so huge that many of the SOE were insolvent
> when the commodity markets were trading lower at the start of this
> year. I dare say this had something to do with the SOE's taking on
> huge speculative inventory in order to push the spot price up (which
> had the dual effect of making spot price more in line with futures
> price - ie reducing the spread and also making their massively leveraged
> derivative positons less damaging)
>
> This incident also brings to light that budget sheets on the Chinese
> companies/banks were (maybe are) probably no better that their western
> counterparts. Which is quite a scary thought...
>
> The governments response shows once again that in effect the Chinese
> government is now implicitly/explicitly guarantor for everything
> stupid the Banks/SOE's do as well as the markets. The market is in
> effect a symbolic mirror, of 'Daddy is rich, he'll get me out of
> trouble if I do anything naughty'. And this can only lead to a corporate
> culture of gambling and corruption, I wish I was a high level trader
> for one of the protected instiutions. This can only lead to bad investments
> and huge write offs. It is no different to making State Banks lend
> to unprofitable SOE's for political/employment reasons and this destroyed
> the banking sector in China at least twice. Chinese Rogue
>
> When I think about things I recall I use to believe the government
> very much wanted the stockmarket to go up to create a wealth effect
> to stimulate domestic demand and that was part of their tool box.
> Now I believe that in fact the government wants the stockmarket to
> entice the chinese savers to move their money out of savings in order
> to allocate capital to their 'strategic corporations'. The best way
> to do this is close off flows going out of the country, then creating
> asset bubbles to entice savers money into the market which is then
> used to buy overvalued stock of their 'strategic corporations' during
> the distribution phase. Anyone that has seen the huge amount of stock
> coming into the market shortly because of lock-up expiration will
> be able to connect exactly why the market is being talked up by the
> government.
>
> This is all being done on the premise that asset price bubbles in
> China are fine because if they keep all flows from leaving China
> then all that is happening is money is being lost by some and distributed
> to others. We all know who the winners are and the losers are. Of
> course this is not true, because there is always an element of karma
> in economics.
>
> When this gigantic distribution is finished, confidence among the
> people can only go lower. Once again a lot of money will be lost
> by the masses. So in the medium term without large increase in wages,
> consumption can not go higher.
>
> I hope everyday that China can truly reform to the better of its
> people and the evolution of the prosperity of the world. But it seems
> the current aging generation is motivated by power, wealth and keeping
> their cronies rich at the expense of the masses. This is not congruent
> with increasing domestic demand and I am slowly but surely losing
> hope that things can change in the short term.
>